Corporate Financial Management: SML, CML, Minimum Variance Portfolios and CAPM

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
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1CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction:....................................................................................................................................2
Differences between security market line (SML) and capital market line (CML) with graphical
illustration:.......................................................................................................................................2
Importance of minimum variance portfolios:..................................................................................7
Relevancy of CAPM over other equations when calculating required rate of return:.....................9
Conclusion:....................................................................................................................................12
References:....................................................................................................................................13

2CORPORATE FINANCIAL MANAGEMENT
Introduction:
The current assignment aims to deal with the various aspects related to corporate finance
with special emphasis provided to security analysis and portfolio management. The concepts of
security market line, capital market line, minimum variance portfolios and capital asset pricing
model (CAPM) are used by the investors so that they could form a portfolio of stocks based on
which investment decisions would be undertaken (Antoniou, Doukas and Subrahmanyam 2015).
The first section of the paper would highlight the key differences between security market line
(SML) and capital market line (CML) with the help of graphical representation. The second
segment would emphasise on describing the significance of minimum variance portfolios, as
they are widely used for analysing future risk and returns. Finally, the assignment would shed
light on explaining the relevance of CAPM over the other equations at the time of computing
required rate of return on a specific investment.
Differences between security market line (SML) and capital market line (CML) with
graphical illustration:
For differentiating between CML and SML, the efficient frontier could be taken into
consideration, which is illustrated as follows:

3CORPORATE FINANCIAL MANAGEMENT
Figure 1: Efficient frontier
(Source: Besley 2016)
The above figure represents the efficient frontier, in which the investor could invest either
in points A and B or in points B and C. In addition, the figure signifies the preference of the
investor for investment in securities between B and C. Despite the fact that A and C carry the
same risk level, the return for C would be higher than that of A. Hence, the preference of the
investor would be C over A.