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) most likely:
The SML uses beta as its risk measure. It relates expected return to systematic risk and applies to all securities and portfolios, whether efficient or not. The capital market line instead uses standard deviation and covers only efficient portfolios combining the risk-free asset and the market portfolio.
- Aapplies to efficient portfolios only
- Buses beta as its measure of riskCorrect
- Cplots expected return against standard deviation
Explanation
The SML plots expected return against beta (systematic risk) and applies to any security or portfolio, efficient or not. The CML plots expected return against total standard deviation and applies only to efficient portfolios.
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