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Security Market Line Assignment

   

Added on  2021-02-18

10 Pages2565 Words91 Views
Finance Questions: Fin 200
Security Market Line Assignment_1
Table of ContentsINTRODUCTION...........................................................................................................................3TASK 2............................................................................................................................................3Difference between Security Market Line and Capital market Line..........................................3Importance of Minimum Variance Portfolio...............................................................................5CAPM equation relevancy towards other equations when calculating required rate of return ..7CONCLUSION................................................................................................................................9REFERENCES .............................................................................................................................10
Security Market Line Assignment_2
INTRODUCTIONSecurity market line (SML) is a graphical representation of Capital Asset Pricing Model,that shows various levels of market or systematic risks of different marketable securities plannedfor expected return of entire market at given point of time. Which is been differentiated fromCapital market line. Importance of minimum variance portfolios are identified. The importanceof Minimum Variance portfolios is that, it builds portfolios which have both risk free assets andrisk bearing securities. CAPM model is been used for describing relationship between systematicrisk and expected return on assets.TASK 2Difference between Security Market Line and Capital market LineCapital market line: Capital market line (CML) is a tangent line drawn from the point of riskfree asset to the feasible region for risky asset. It also depicts the trade off between return andrisk for effective portfolio. CML can be described as a theoretical concept which represent allportfolios that are optimally combines the risk free rate of return and the market portfolio ofassets that are risky in nature. In CAPM (Capital asset pricing model) All investors are able tochoose their position on the capital market line, in equilibrium, by lending or borrowing at therisk free rates, since these increases for a level of given risk effectively.Security market line: Security market line is a line drawn on a chart which serve as a graphicalrepresentation of the CAPM (Capital asset pricing model) which helps to show the various levelof systematic, market, risks associated with different marketable securities plotted against thereturn which are expected for the entire market at a given time point. It can be also described as avisual of CAPM where the x-axis of the chart represents risks in terms of beta, and y-axis ofchart represent return that are expected effectively. The market risks premium of a given securityis evaluated by where it is usually plotted on the chart in relationship with the SML. Capital Market LineSecurity Market LineThis line is used to show rates of returndepends upon risk free ratesThis is Graphical representation of market risksand return in a given timeStandard deviation measures risk for CMLBeta Coefficient determines risk factor of SMLThey only determine efficient portfoliosThey define both efficient and non-efficientportfolios
Security Market Line Assignment_3

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