Corporate Financial Management: Differences between SML and CML, Minimum Variance Portfolios, and Relevancy of CAPM Approach

Corporate Financial
Management

Introduction
 The Security Market Line represents the CAPM model. It is used to
draft both the systematic and the non-diversifiable risk that is
expresses as a beta sign within a specific period.
 The Capital Market Line is a measure that is used to evaluate the
performance of a portfolio and its graph is used in the asset driving
model when calculating a portfolio’s rate of return.
 The report addresses the differences between SML and CML,
importance of the minimum variance portfolios, and the relevancy of
the CAPM model.

Differences between SML and CML
SML
CML
1. The Security Market Line graphically represents the CAPM model and it
expresses how systematic and non-diversifiable risk functions relate to the
required return of an individual investment graphically (Barberis, et al, 2015,
pp.17). However, the Capital Market Line is a graphical representation of
CAPM’s that expresses the correlation between the total risk of a portfolio and
the expected return on the efficient portfolio.

Cont.
2. The SML uses beta in measuring risk and it is applicable when
identifying the contribution of security risk to the portfolio while the
Capital Market Line uses the total risk factor or the standard deviation
when measuring risk.
3. The SML graph is used when defining the efficient and the non-
efficient portfolios while the Capital Market Line is a graph is used in
defining efficient portfolios.