Security Market Line - SML


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".


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BREAKING DOWN '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.

  1. Systematic Risk

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  2. Efficient Frontier

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  3. Beta

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  4. Modern Portfolio Theory - MPT

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  5. Capital Market Line - CML

    A line used in the capital asset pricing model to illustrate ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
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  1. What types of risk are incorporated in Security Market Line (SML) analysis?

    The security market line (SML) is a line plot that graphs an investment's risk versus its return. Essentially, it is a graph ... Read Full Answer >>
  2. How is the Capital Asset Pricing Model (CAPM) represented in the Security Market ...

    The capital asset pricing model (CAPM) is a measure that describes the relationship between the systematic risk of a security ... Read Full Answer >>
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    Net present value (NPV) calculations should include the discounted value of changes in working capital. This treatment of ... Read Full Answer >>
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