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.

Efficient Frontier
Efficient frontier is a portfolio that offers the highest expected ... 
RiskFree Return
Riskfree return is the theoretical return attributed to an investment ... 
Market Portfolio
A theoretical bundle of investments that includes every type ... 
Markowitz Efficient Set
The Markowitz efficient set is a portfolio with returns that ... 
Modern Portfolio Theory  MPT
Modern portfolio theory (MPT) looks at how riskaverse investors ... 
Mutual Fund Theorem
The mutual fund theorem is an investing theory suggesting the ...

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. 
Managing Wealth
Modern Portfolio Theory: Why It's Still Hip
Investors still follow an old set of principles, known as modern portfolio theory (MPT), that reduce risk and increase returns through diversification. 
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
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. 
Managing Wealth
Achieve Optimal Asset Allocation
Minimize risk while maximizing return with the right mix of securities and achieve your optimal asset allocation. 
Investing
Explaining The Efficient Frontier
Most investment choices involve a tradeoff between risk and reward. The "Efficient Frontier" is a modern portfolio theory tool that shows investors the best possible return they can expect from ... 
Insights
Forging Frontier Markets
Pioneering is never easy, but it has its exciting  and worthwhile  moments for investors. 
Investing
Introduction to International CAPM
ICAPM is one of several models used to determine the required return on an asset.

Use market risk premium for expected market return
Find out how the expected market return rate is determined when calculating market risk premium – and how to estimate investment ... Read Answer >> 
How is the riskfree rate determined when calculating market risk premium?
Learn how the riskfree rate is used in the calculation of the market risk premium, and understand why Tbills provide the ... Read Answer >> 
What is the difference between a sharpe ratio and an information ratio?
Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >>