What is the 'Capital Market Line  CML'
The capital market line (CML) appears in the capital asset pricing model to depict the rates of return for efficient portfolios subject to the risk level (standard deviation) for a market portfolio and the riskfree rate of return.
The capital market line is created by sketching a tangent line from the intercept point on the efficient frontier to the place where the expected return on a holding equals the riskfree rate of return. However, the CML is better than the efficient frontier because it considers the infusion of a riskfree asset in the market portfolio.
BREAKING DOWN 'Capital Market Line  CML'
The capital asset pricing model (CAPM) proves that the market portfolio is the efficient frontier. It is the intersection between returns from riskfree investments and returns from the total market. The security market line (SML) represents this.
The capital asset pricing model determines the fair price of investments. Once the fair value is determined, it is compared to the market price. A stock is a good buy if the estimated price is higher than the market price. However, if the price is lower than the market price, the stock is not a good buy.
In the CAPM, the securities are priced, so the expected risks counterbalance the expected returns. There are two components needed to generate a CAPM, CML and the SML. The capital market line conveys the return of an investor for a portfolio. The capital market line assumes that all investors can own market portfolios.
Single assets and nonefficient portfolios are not depicted on the CML. Alternatively, the SML must be used. The capital market line permits the investor to consider the risks of an additional asset in an existing portfolio. The line graphically depicts the risk top investors earn for accepting added risk.
Separation Theorem
All investors have portfolios on the CML relying on the riskreturn preferences. However, the market portfolio and the CML are depicted without reference to the riskreturn tradeoff curves of the investors. This result is Tobin’s Separation Theorem. It states that the best blend of risky assets in the market portfolio is determined without considering the riskreturn preferences of the investors.
Locating the best portfolio for a specific risk tolerance level consists of two methods: finding the best blend of market securities that does not fluctuate with risk tolerance and then joining it with a suitable amount of money.
History
In 1952, Harry Markowitz wrote his doctoral dissertation titled Portfolio Selection that recognized the efficient frontier. In 1958, James Tobin included leverage to the portfolio theory by including in the analysis an asset that pays a riskfree rate. However, when combining a norisk asset with a portfolio on the efficient frontier, it is possible to assemble portfolios whose riskreturn profiles are above those of portfolios on the efficient frontier.
In 1964, William Sharpe developed the CAPM that exhibits assumptions; the efficient portfolio has to be the market portfolio. Based on this, typical investors must keep the market portfolio leveraged or deleveraged to realize their desired risk.

Inefficient Portfolio
An inefficient portfolio is one that delivers an expected return ... 
Efficient Frontier
Efficient frontier is a portfolio that offers the highest expected ... 
RiskFree Return
Riskfree return is the theoretical return attributed to an investment ... 
Mutual Fund Theorem
The mutual fund theorem is an investing theory suggesting the ... 
RiskFree Asset
A riskfree asset is an asset which has a certain future return ... 
Characteristic Line
A characteristic line is a line formed using regression analysis ...

Investing
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. 
Investing
Want A HighYield Healthcare Stock? Look To Canada
CML HealthCare isn't flashy, but it's a reliable dividend payer. 
Investing
Capital Asset Pricing (CAPM) Model: Pros and Cons
CAPM, while criticized for its unrealistic assumptions, provides a more useful outcome than either the DDM or WACC in many situations. 
Financial Advisor
Measure Your Portfolio's Performance
Measuring the success of your investment solely on the portfolio return may leave you blindsided to risk. Learn how to evaluate your investment return. 
Investing
How Risk Free Is the RiskFree Rate of Return?
This rate is rarely questioned—unless the economy falls into disarray. 
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 ... 
Tech
CAPM vs. Arbitrage Pricing Theory: How They Differ
Both project the expected rate of return given the level of risk assumed, but they consider different variables. 
Investing
How AQR Places Bets Against Beta
Learn how the bet against beta strategy is used by a large hedge fund to profit from a pricing anomaly in the stock market caused by high stock prices.

How do I use the CAPM (capital asset pricing model) to determine cost of equity?
Learn about the elements of the capital asset pricing model, and discover how to calculate a business' cost of equity financing ... Read Answer >> 
How do I calculate the cost of equity using Excel?
Learn how to calculate the cost of equity in Microsoft Excel using the capital asset pricing model, or CAPM, including brief ... Read Answer >> 
How does market risk affect the cost of capital?
Find out how market risk directly affects the total cost of capital, including how to use the capital asset pricing model ... Read Answer >> 
According to the CAPM, the expected return on a stock, that is part of a portfolio, ...
A. the covariance between the stock and the market. B. the variance of the market. C. the market risk premium. D. ... Read Answer >>