Exploring Security Market Line, Capital Market Line, Minimum Variance Portfolio and CAPM Calculation in Corporate Finance

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction:...............................................................................................................................2
Exploring the difference between security market line (SML) and capital market line (CML):
....................................................................................................................................................2
Exploring the significance of Minimum Variance Portfolio (MVP):........................................5
Exploring why CAPM calculation is used for identifying the required rate of return by
investors:....................................................................................................................................7
Conclusion:................................................................................................................................9
References and Bibliography:..................................................................................................10

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Introduction:
The assessment evaluates the significance of Security market line, capital market line,
minimum variance portfolio and Capital Asset pricing model. In addition, the investors
intends to formulate the portfolio, which has returns and low risk from investment. The
assessment sheds light on the difference between the security market line and capital market
line, which is used for understanding the risk and return attributes of an investment.
Minimum variance portfolio is considered to be one of the viable approaches, which is used
by investors for contemplating the future returns and risk associated with investment.
Furthermore, the belief of investors on CAPM Model is relatively high, as the technique has
allowed the investors to detect the minimum returns that should be provided by investment in
comparison to its risk attribute.
Exploring the difference between security market line (SML) and capital market line
(CML):
Figure 1: Security Market Line (SML) Graph
(Source: Brooks and Mukherjee 2013)

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Figure 2: Capital Market Line (CML) Graph
(Source: Christensen, Hail and Leuz 2016)
The above figure 1 and 2 relatively depict the SML and CML graph, which could be
used by investor for analyzing the current trajectory of the stocks and determine its return and
risk attribute. Furthermore, the graph adequately indicates that with the help of security
market line the investors are able to understand the level of relationship between the
systematic risk and return from investment. This is mainly contemplated by using the
expected return and beta of the stock to determine the minimum returns that it needs to
provide during the investment phase. On the other hand, figure 2 depict the curve, which is
created by using different portfolio weights that helps in detecting the minimum risk that
could be generated from a particular portfolio. The further differences between the capital
SML and CML are elaborated as follows.
Difference is risk consideration:
There are different risk attributes associated with the capital market line and security
market line, which is detected in the calculation of risk and reward section of the
investment. This alteration in the risk consideration directly alters the way which an investor