Financial Management: CML vs SML, Minimum Variance Portfolios, and CAPM Equation

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL MANAGEMENT
Table of Contents
Introduction:....................................................................................................................................2
Differences between capital market line (CML) and security market line (SML) with the help of
graphical illustration:.......................................................................................................................2
Importance of minimum variance portfolios:..................................................................................8
Evaluation of CAPM equation:.....................................................................................................10
Conclusion:....................................................................................................................................11
References:....................................................................................................................................12

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Introduction:
. The report is prepared for demonstrating different aspect of the corporate financial
management with particular emphasis on portfolio management, capital market theory and
security market analysis. The objective studying investment management and portfolio analysis
is to gain an understanding in the field of investment for understanding the concept of sound
investment decision making. Investors relies on the concept of capital market line, capital asset
pricing model, minimum variance portfolios and security market line to have an understanding of
the portfolios of stocks and making feasible investment. In the first section, the graphical
illustrations of the difference between security market and capital market line has been
demonstrated. The second part of report emphasises on the importance of minimum variance
portfolios that helps in explaining the relationship between risk and return. The last section of
report deals with the evaluation of the equation of Capital asset pricing model (CAPM) that helps
investors in finding the optimum portfolio.
Differences between capital market line (CML) and security market line (SML) with the
help of graphical illustration:
The concept of efficient frontier can be taking into account for explaining the difference
between capital market line and security market line. Efficient frontier is depicted graphically in
the diagram show below which outlines three investment point of investors such as either A or B
and B or C. However, investor would prefer making investment at point B or C as it provides
higher level of return compared to A. Here, C would of offering higher return along with higher
risk compared to point A or B with lower level of risk. Therefore, investor would prefer to opt
for investment decision C compared to A.

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Graph 1: Efficient frontier curve
(Source: Christensen et al. 2016)
Graph 2: Graph depicting Capital market line
(Source: Yang et al. 2015)