Loading the player...
What is the 'Capital Market Line  CML'
The capital market line (CML) is a line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the riskfree rate of return and the level of risk (standard deviation) for a particular portfolio.
Next Up
BREAKING DOWN 'Capital Market Line  CML'
The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the riskfree rate of return.
The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a riskfree asset in the portfolio. The capital asset pricing model (CAPM) demonstrates that the market portfolio is essentially the efficient frontier. This is achieved visually through the security market line (SML).
RELATED TERMS

Efficient Frontier
A set of optimal portfolios that offers the highest expected ... 
RiskFree Rate Of Return
The theoretical rate of return of an investment with zero risk. ... 
RiskFree Return
The theoretical rate of return attributed to an investment with ... 
RiskFree Asset
An asset which has a certain future return. Treasuries (especially ... 
Market Risk Premium
The difference between the expected return on a market portfolio ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ...
Related Articles

Fundamental Analysis
Explaining the Capital Market Line
The capital market line (CML) depicts the level of additional return above the riskfree rate for each change in the level of risk. 
Professionals
The Capital Market Line
CFA Level 1  The Capital Market Line. Learn how the capital market line relates expected return to a security's standard deviation. Differentiates systematic and unsystematic risk. 
Professionals
Capital Market Theory
CFA Level 1  Capital Market Theory. Learn the assumptions behind the capital market theory. Shows what happens to a portfolio's return and variance when adding a riskfree asset. 
Professionals
Review Questions 1  6
Review Questions 1  6 
Professionals
Modern Portfolio Theory (MPT)
Modern Portfolio Theory (MPT) 
Bonds & Fixed Income
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Investing
RiskFree Rate of Return
The riskfree rate of return is the theoretical rate of return of an investment with zero risk. The riskfree rate represents the interest an investor would expect from an absolutely riskfree ... 
Fundamental Analysis
How Investment Risk Is Quantified
FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk. 
Professionals
Portfolio Management Theories
CFA Level 1  Portfolio Management Theories. Learn the main theories behind portfolio management. Includes information on risk aversion, Markowitz theory and the efficient frontier. 
Investing
Understanding Market Risk Premium
Market risk premium is equal to the expected return on an investment minus the riskfree rate. The riskfree rate is the minimum rate investors could expect to receive on an investment if it ...
RELATED FAQS

How have portfolios from within the efficient frontier performed historically?
Explore how the efficient frontier is used in selecting investment portfolios. Find out how risks and returns are used to ... Read Answer >> 
What are the advantages of portfolio planning with the efficient frontier?
Learn about modern portfolio theory and the efficient frontier. Understand the advantages of portfolio planning with the ... Read Answer >> 
How do I interpret a Security Market Line (SML) graph?
Find out how to interpret stocks and portfolios through a security market line, or SML, graph as part of the Capital Asset ... Read Answer >> 
How is it possible for a rate to be entirely riskfree?
Find out whether there really is such a thing as a riskfree rate of return, and learn why taking the idea of riskfree rates ... Read Answer >> 
What is the correlation between equity risk premium and risk?
Learn about the relationship between the riskfree rate of return and the equity risk premium, and understand how the riskfree ... Read Answer >> 
How accurate is the equity risk premium in evaluating a stock?
Learn about the drawbacks of using the equity risk premium to evaluate a stock, and understand how it is calculated using ... Read Answer >>