Corporate Financial Management: SML, CML, MVP, and CAPM

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student:
Name of the University:
Authors Note:

CORPORATE FINANCIAL MANAGEMENT
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Table of Contents
Introduction:...............................................................................................................................2
Indicating the alteration between SML and 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:...............................................................................................................................10

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Introduction:
The report aims in highlighting the different level of measure, which allows investors
to maximise the level of returns from investment. The difference between the SML and CML
line has mainly allowed the investors to identify the level of investment risk, which needs to
be evaluated before conducing investment decisions. Furthermore, the presence of minimum
variance portfolio has mainly allowed investors for raising the level of income from
investment, which reducing the level of risk hampering the portfolio. The calculations of
CAPM allow the investor for detecting the level of expected returns, which can be generated
from investment. However, there are certain level of methods, which are used by investors
instead of CAPM model for detecting the level of risk and returns.
Indicating the alteration between SML and CML:
Figure 1: Security Market Line (SML) Graph1
1 Hong, Harrison, and David A. Sraer. "Speculative betas." The Journal of Finance 71.5
(2016): 2095-2144.

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Figure 2: Capital Market Line (CML) Graph2
The above figures directly help in depicting the level of different characteristics of
SML and CML, which can be used by investor for improving their current investment scope.
Furthermore, the difference directly indicates the level of risk and return attribute, which can
be used by organisations for improving their current return generation capability. Therefore,
it can be detected that with the use of CML investor are able to detect the performance of a
portfolio, which helps them to make adequate investment decisions. On the other hand, the
SML line directly depicts the significance of a partial stock, while detecting its risk and return
attribute. The difference between the CML and SML is further elaborated.
Risk Measurement:
The major difference between SML and CML line is overall risk measure, which is
depicted by the calculation. The calculations conducted by the SML method directly uses
beta of the stock for determining the level of risk engulfing the investment. In addition, the
CML adequately uses standard deviation for calculating the risk measures of the investment.
Both the risk and return attributes of the stock can be used for investment by the investor for
2 Christensen, Hans B., Luzi Hail, and Christian Leuz. "Capital-market effects of securities
regulation: Prior conditions, implementation, and enforcement." The Review of Financial
Studies 29.11 (2016): 2885-2924.