Concept
Security characteristic line
Related concepts (4)
Capital allocation line
Capital allocation line (CAL) is a graph created by investors to measure the risk of risky and risk-free assets. The graph displays the return to be made by taking on a certain level of risk. Its slope is known as the "reward-to-variability ratio". The capital allocation line is a straight line that has the following equation: In this formula P is the risky portfolio, F is riskless portfolio, and C is a combination of portfolios P and F. The slope of the capital allocation line is equal to the incremental return of the portfolio to the incremental increase of risk.
Capital market line
Capital market line (CML) is the tangent line drawn from the point of the risk-free asset to the feasible region for risky assets. The tangency point M represents the market portfolio, so named since all rational investors (minimum variance criterion) should hold their risky assets in the same proportions as their weights in the market portfolio. The CML results from the combination of the market portfolio and the risk-free asset (the point L).
Security market line
Security market line (SML) is the representation of the capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk. The risk of an individual risky security reflects the volatility of the return from security rather than the return of the market portfolio. The risk in these individual risky securities reflects the systematic risk. The Y-intercept of the SML is equal to the risk-free interest rate.
Market portfolio
Market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market, with the necessary assumption that these assets are infinitely divisible. Richard Roll's critique states that this is only a theoretical concept, as to create a market portfolio for investment purposes in practice would necessarily include every single possible available asset, including real estate, precious metals, stamp collections, jewelry, and anything with any worth, as the theoretical market being referred to would be the world market.