DEFINITION of 'Security Market Line  SML'
A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities.
Also refered to as the "characteristic line".
VIDEO
BREAKING DOWN 'Security Market Line  SML'
The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The xaxis represents the risk (beta), and the yaxis represents the expected return. The market risk premium is determined from the slope of the SML.
The security market line is a useful tool in determining whether an asset being considered for a portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued because the investor can expect a greater return for the inherent risk. A security plotted below the SML is overvalued because the investor would be accepting less return for the amount of risk assumed.

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