Investment Management: CML vs SML, Minimum Portfolio Variance, CAPM Equation

This article discusses the difference between CML and SML, the importance of minimum portfolio variance, and the significance of CAPM equation in investment management. It explains how investors can maximize profits while minimizing risk from investment. The subject is investment management, and the course code, name, and university are not mentioned.

Running head: INVESTMENT MANAGEMENT
Investment Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction:...............................................................................................................................2
Stating graphically the difference between CML (Capital Market Line) and SML (Security
Market Line):.............................................................................................................................2
Identifying and discussing the importance of minimum portfolio variance:.............................5
Evaluating the CAPM equation and indicating its significance in comparison to other
formulas used for calculating required rate of return:................................................................8
Conclusion:................................................................................................................................9
Reference and Bibliography:....................................................................................................11

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Introduction:
The aim of investors is to evaluate different investment formulas and scopes which
could detect the stocks that helps in generating the highest rate of return from investment
with low risk. Hence, different level of theories and formulas are relatively evaluated in the
assessment to identify the significance of different investment phase for an investor. The
difference between capital market line and security market line is evaluated to allow the
investors understand the significance of both the market lines. The significance of minimum
variance portfolio is also evaluated which would allow investors to understand the advantage
of having the lowest risk generating portfolio. Lastly, the significance and use of CAPM
formula is stated, which is relatively used in maximum of the possible to identify risk and
return of a particular investment. Therefore, the evaluation would eventually allow investors
to detect the significance of theories and formulas while making any kind of investment
decisions.

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Stating graphically the difference between CML (Capital Market Line) and SML
(Security Market Line):
Figure 1: CML (Capital Market Line) and SML (Security Market Line)
(Source: Kahn and Lemmon 2016)
Capital market line and security market line at different investment measures which
are used by investors to detect stocks which has the least risk and highest return from
investment. Both the market lines have different significance for the investors and is
considered important while making any kind of investment decisions. With the use of capital
market line investors are able to goes into the portfolio efficiency which relatively indicates
the overall profits and risk involved in investment. Moreover, the capital market line aims in
understanding different kind of portfolios for the investors who aims to maximize the profit
and minimize any kind of dress from investment. Similarly, investors utilize the security
market line, as a risk evaluator, where the stocks needs to be at the SML line to be effective
for investment (Fender et al. 2016). There is the significant difference between capital market
line and security market line which needs to be understood by investors before conducting

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any kind of Investments. these differences and significance can only be described with the
help of the following measures.
Nature of Investment:
The major difference between security market line and capital market line is the
nature of investments that evaluates. security market line mainly focuses on the individual
stocks and identify the risk return attributes on the prospects of risk free rate, beta, and
market return. this combination of the security market line allows the investors to understand
the significance of required rate of return that needs to be provided from a particular
investment. However, the capital market line is focused on portfolios comprising of different
level of stocks with high and low risk. This method directly helps in improving the level of
returns that could be generated from investment. Therefore, investors need to evaluate the
particular stocks on the basis of security market line and create the portfolio with the help of
capital market line.
Relationship between risk and return attributes:
Risk and return calculation of capital market line and security market line is relatively
different, which allows the investor to detect stocks with the highest rate of return. Capital
market line mainly uses the standard deviation of the stock returns to understand the level of
risk involved in the investment. The risk attributes of capital market line are only focused on
the fluctuations of the price of a particular product. This helps in detecting the risk and
reward ratio of the stock, which would help in drafting an adequate portfolio. This would
eventually help in understanding the level of return and risk of an investment before
including them in the portfolio. However, the risk and return attribution of security market
line is relatively different, where it uses beta to calculate the risk of a particular stock. Beta of
a stock is calculated with the help of the correlation of returns between market and the stock.

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This correlation indicates the impact market has on the price volatility of the stock, which
could be used to maximize the return from investment (Balance 2014).
Measuring of risk:
Security market line relatively helps in measuring the risk with the help of Beta,
which directly allows the investors to compare its investments with the market return and
risk. The representation of risk with the help of security market line allow the investors to
generate higher rate of return from Investments. On the other hand, the risk attributes of
capital market line are calculated with the help of standard deviation which is calculated on
the basis of total risk factor. The detection of total respective allows the capital market line
identify stocks, which would generate the highest rate of return from investment while having
minimized risk.
Detecting efficiency of the portfolio:
Portfolio efficiency is a relatively improved with the help of both the market lines,
which allow investor to identify stocks with the highest rate of return and low risk. Investors
with the help of security market line is able to detect stocks with beta and return capability,
which could be used to form an effective portfolio. However, the capital market line
relatively utilizes the portfolio risk and return attribute, which helps in identifying the
combination of stocks that delivers the highest returns from investment. The combination of
stocks a relatively helps in understanding the level of returns, which could be generated from
an investment (Kahn and Lemmon 2014).

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Identifying and discussing the importance of minimum portfolio variance:
Figure 2: Minimum Variance Portfolio
(Source: Kim, Maurer and Mitchell 2016)
The above figure a relatively helps in detecting the overall minimum variance
portfolio which would allow investors to maximize their profits by conducting investments
on portfolios having the lowest risk. The figure directly helps in detecting the Two different
lines which is constructed to identify the stocks with the least risk involved in Investments.
One of the curve is Markowtiz Frontier, indifference curve and capital allocation line. With
the help of the above curve and lines investors are able to detect the minimum variance
portfolio, which has the lowest risk involved in Investments. The green dot is named the
Global minimum variance portfolio, as there is no portfolio that could provide the lowest risk
involvement in Investments. The other points in the graph is a relatively considered the

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optimal risky portfolio, maximum utility portfolio and the aggregate bond index. These are
relatively used to identify the minimum variance portfolio, which would help in maximizing
the level of returns from investment without encouraging any kind of unsystematic risk
(Carlsson and Nilsson 2017). The significance of minimum variance portfolio is stated below
which could allow investors to detect the viability of the approach.
Decline in Losses:
With the use of minimum variance portfolio investors are able to minimize the losses
that is incurred from investments in the capital market. The decline in losses relatively occurs
due to the presence of Minimum variance portfolio which allows the investors to only select
stocks which has the least risk from investment. The combination of different stocks is used
to identify the portfolio that has the least risk involved in Investments to be used by investors
to maximize their profits in an uncertain and volatile capital market. The minimum variance
portfolio investors to identify the stocks which does not reflect on the price changes and
fluctuations of the capital market.
Use of Appropriate investment weights:
With the help of minimum variance portfolio investors are directly able to detect the
level of weights, which needs to be invested in a particular stock. The investors are relatively
provided with adequate investment opportunity with the help of minimum variance portfolio,
as the combination of stocks allow them to maximize their profits from a low risk portfolio.
In this context, HA Davis and Lleo (2015) stated that with the use of appropriate we investors
able to combine different stocks in one particular portfolio, which improve the level of profits
while mitigating risk. However, the return on minimum variance portfolio is relatively low,
as the portfolio only focuses on reducing risk and does not consider the return factor, which is
demanded by investors.

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Detecting the range of portfolios:
Moreover, with the help of a minimum variance portfolio calculation the investors are
able to detect the range of put values that could be used for investment. Portfolios such as
minimum utility portfolio, optimal risky portfolio, and aggregate portfolio, which a relatively
helps in maximizing the profits while minimizing risk from investment. Minimum variance
portfolio calculation allows the investors to segregate the stocks in accordance with the risk
where adequate they are used to determine the return and the risk attributes of a particular
investment.
Analyzing different Investment scope:
Minimum variance portfolio helps the investors to analyses different investment
scopes by providing them with the least risk portfolio which could be used for investment.
Hence, the investors could use the minimum variance portfolio as a benchmark for analyzing
different portfolios which could provide the highest rate of return from investment.
Therefore, the minimum variance portfolio allows the investors to analyses different
investment scope which would generate the highest rate of return while reducing the risk
from investment (Andonov, Eichholtz and Kok 2015).

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Evaluating the CAPM equation and indicating its significance in comparison to other
formulas used for calculating required rate of return:
Figure 3: Capital Asset Pricing Model formula and Diagram
(Source: Michaud 2017)
The formula and diagram of Capital Asset pricing model is relatively depicted in the
above figure, which helps in understanding the significance of the formula in deriving the
required rate of return. CAPM formula is relatively used by investors in different formulas
such as weighted average cost of capital to detect the minimum required rate of return that is
needed by the organisation. This relatively indicates the significance of Capital Asset pricing
model which allows the investors to understand the level of risk and return involved in

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Investments. The CAPM formula is relatively used for its simplicity, as investors are able to
identify investment scopes which could detect the stocks with the highest rate of return.
However, the formula depicts the significance of Beta which relatively changes all stocks.
higher the beta higher will be the required rate of return calculated from CAPM. This
relatively indicates that the risk attributes directly compliment the return generation
capability of a particular stock (Dimmock, Gerken and Marietta-Westberg 2015).
Other formulas used for deriving the required rate of return does not comprehend the
simplicity of detecting the returns provided for a particular stock. CAPM formula a relatively
uses the systematic risk that affects the return generation capability of a particular stock, as
the unsystematic risk is not involved or detected by investors. Therefore, the formula is
relatively effective for investment purposes and has been used in different formulas such as
dividend discount model, weighted average cost of capital model etc.
Hence, it could be understood that with the use of CAPM formula investors are able
to not only detect the required rate of return but the risk attributes of a particular investment.
The results provided by CAPM is for the segregated in different levels and formulas to
understand the actual return and risk attribute of a particular stock. Therefore, it could be
understood that without the CAPM formula the investors will not be able to identify the stock
Returns, which is used to conduct investment decision (Polearuş 2017).
Conclusion:
After evaluating the relevant theories and formulas presented in the above assessment
it could be identified that with these measures investors could maximize their profits file
minimise risk from investment. The use of minimum variance portfolio would eventually
allowed investor to reduce the level of risk involved in Investments. On the other hand, the
use of capital market line would eventually value at the portfolio on the basis of risk and

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return attributes. The security market line would also evaluate the stocks based on risk
situated with the volatility of capital market. However, the significance of Capital Asset
pricing model is a relatively depicted, which indicates that the formula is effectively used by
investors all around the world to drive the required rate of return from an investment.

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Reference and Bibliography:
Andonov, A., Eichholtz, P. and Kok, N., 2015. Intermediated investment management in
private markets: Evidence from pension fund investments in real estate. Journal of Financial
Markets, 22, pp.73-103.
Balance, P.A., 2014. Investment management. City.
Carlsson Hauff, J. and Nilsson, J., 2017. The impact of country-of-origin cues on consumer
investment behavior: The moderating influence of financial brand strength and investment
management style. European Journal of Marketing, 51(2), pp.349-366.
Dimmock, S.G., Gerken, W.C. and Marietta-Westberg, J., 2015. What determines the
allocation of managerial ownership within firms? Evidence from investment management
firms. Journal of Corporate Finance, 30, pp.44-64.
Fender, R., Adams, R., Barber, B. and Odean, T., 2016. Gender Diversity in Investment
Management: New Research for Practitioners on How to Close the Gender Gap. Research
Foundation Briefs, 5(1), pp.1-16.
HA Davis, M. and Lleo, S., 2015. Risk-Sensitive Investment Management.
Kahn, R.N. and Lemmon, M., 2014. The Asset Manager’s Dilemma: How Strategic Beta Is
Disrupting the Investment Management Industry. Working paper, BlackRock.
Kahn, R.N. and Lemmon, M., 2016. The asset manager’s dilemma: How smart beta is
disrupting the investment management industry. Financial Analysts Journal, 72(1), pp.15-20.
Kim, H.H., Maurer, R. and Mitchell, O.S., 2016. Time is money: Rational life cycle inertia
and the delegation of investment management. Journal of financial economics, 121(2),
pp.427-447.

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Michaud, R.O., 2017. Comment On:'The Road Not Taken'by Craig W. French Journal of
Investment Management, Vol 14, No. 4, 2016.
Monk, A., Sharma, R. and Sinclair, D.L., 2017. Reframing finance: New models of long-term
investment management. Stanford University Press.
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investment management. Stanford University Press.
Polearuş, V., 2017. Investment Management Resources in the distribution channel of
international oil companies. Development.
Torto, R.G., 2017. Investment and development behavior following the Great
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van Duuren, E., Plantinga, A. and Scholtens, B., 2016. ESG integration and the investment
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