Market Line and Capital Assets Pricing Model

Running head: CAPITAL ASSET PRICING MODEL 0
CAPM in Market Line Segment
CAPM
[DATE]

Security Market line and capital assets pricing model
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Introduction
This report shows the graphical presentation of the undertaken security market line and
capital market line. It shows how CAPM method is used to compute the required return of the
investors. The graphical representation of the CML and SML will help investors to assess the
low risk and high return on his investment. The main issue in computing the right amount of
cost of capital in particular project is based on setting the risk free rate of return. Many
investors might face issue to undertake the right base at which it will reflects the exact cost of
capital and return associated with the particular accepted project. This essay will focus on the
graphical representation of the CML and SML and the computation of the cost of capital
through the CAPM method.
Explain and graphically depict how Security Market Line
In CAPM, Capital Market Line is determined when in portfolio there is trade-off between
risk and return, it refers to as CML. This helps in determining the optimum point where
company could have optimum risk and return associated with the particular project. On the
other hand, security Market Line is formulated to determine the market risk related to the
marketable securities against the expected return. It is an investment evaluation tool which
helps to evaluate systematic and systematic risk associate or plotted against the expected rate
of market return plotted at the single point. In CML risk is measured and plotted on graph
CML graph portray efficient portfolios while in SML both efficient and non-efficient
portfolios are depicted by the graph. It is analyzed that where SML determines all the security
related factors ,market portfolio and risk free assets are determined by CML. Risks or return
for individual assets/stocks are determined by SML while risk or return for efficient
portfolios are shown by CML. The main Importance of minimum price variance portfolio is
related to determine the expected return, risk of individual risky assets (Brigham, and
Ehrhardt, 2013).
In these two different cases, relation between the risk and return associated with the
investment projects has been determined. In case of model of Sharpe, liner against the case is
free from sharp liner and return is associated with the premium and beta of the market. It is
analyzed that in case of the risky assets and unrestricted shorts selling of the risky portfolio
there might be chance of the high risk and beta associated with the project. The main

Security Market line and capital assets pricing model
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assumption which is determined is that the premium beta is positive and expected return on
the market (Cikaliuk, et al. 2017).
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(Source: Prezi 2017)
This diagram shows the CML and SML of the invested return. It is considered that capital
market line reflects the trade-off between the return and risk of the invested capital. In case of
the CML, investors choose the position on the CML in equilibrium by borrowing or lending
at the risk free rate (Dahir, Mahat, and Ali, 2018). The SML could be described as graphical
presentation of the CAPM model. It is analyzed that if the expected return of the security is
plotted over and above the SML line then it is determined as undervalued and if it is not
given then it will set up risk return trade off. These two graphs are drawn individually with a
view to make the proper graphical presentation and reflect the modes at which investors will
have optimum return with the given level of risk (Yahoo finance, 2018).