CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
Compared with the capital market line (CML), the security market line (SML) is most accurately described as:
The SML plots required return against beta and applies to any security or portfolio, efficient or not. The CML, by contrast, plots return against total risk and applies only to efficient portfolios combining the risk-free asset and the market portfolio.
- Aplotting required return against beta for any securityCorrect
- Bplotting return against total risk for efficient portfolios only
- Capplying only to portfolios that contain no risk-free asset
Explanation
The SML relates expected return to systematic risk (beta) and applies to any security or portfolio. The CML uses total risk (standard deviation) and applies to efficient portfolios combining the risk-free asset and market portfolio.
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