Security Market Line - SML

Filed Under » , , ,
Dictionary Says

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".
Investopedia Says

Investopedia explains 'Security Market Line - SML'

The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta), and the y-axis 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.

Articles Of Interest

  1.

    Beta: Know The Risk

    Beta says something about price risk, but how much does it say about fundamental risk factors? Find out here.

  2. Achieving Better Returns In Your Portfolio

    We look at three risk factors that best explain the bulk of equity performance.

  3. Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return is any investor's prime goal. The right mix of securities is the key to achieving it.

  4. Weighted Average Cost Of Capital (WACC)

    Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality

  5. Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.

  6. Taking Shots At CAPM

    Find out why many investors think the capital asset pricing model is full of holes.

  7. George Soros: The Philosophy Of An Elite Investor

    George Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular.

  8. Understanding And Playing The Dow Jones Industrial Average

    Learn strategies for investing in this price-weighted index and how to interpret its movements.

  9. Introduction To International CAPM

    ICAPM is one of several models used to determine the required return on an asset, discover its limitations and how to use it.

  10. Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Yield Elbow

    The point on the yield curve indicating the year in which the economy's highest interest rates occur. The yield elbow is the peak of the yield curve, signifying where the highest interest rates occurred.

  2. Xenocurrency

    A currency that trades in markets outside of its domestic borders.

  3. Wanton Disregard

    A standard of severe negligence. Wanton disregard is a very serious accusation that indicates that a person behaved extremely recklessly.

  4. Ultra ETF

    A class of exchange-traded funds (ETF) that employs leverage in an effort to achieve double the return of a set benchmark.

  5. Toehold Purchase

    A purchase of less than 5% of a target company's outstanding stockmade by an acquiring company. A toehold purchase of just under 5%, while not a significant stake in a firm, allows the shareholders a "toe-holds" grip on the company and its decision making.

  6. Samurai Bond

    A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.
Trading Center
http://sp.fastclick.net/ad/tr/10858-64082-15546-0?mpt=155f8c38ad4c7959020807c94c9dc6f6