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 EXPLAINS '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.

Systematic Risk
The risk inherent to the entire market or entire market segment. ... 
Efficient Frontier
A set of optimal portfolios that offers the highest expected ... 
Capital Market Line  CML
A line used in the capital asset pricing model to illustrate ... 
Modern Portfolio Theory  MPT
A theory on how riskaverse investors can construct portfolios ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Beta
A measure of the volatility, or systematic risk, of a security ...

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