# Difference Between CML and SML

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Summary

The CML and SML are two methods used to measure risk and return in investment portfolios. The CML plots rates of return against risk using standard deviation, while the SML uses beta coefficients. The CML is used to define efficient portfolios, while the SML specifies both efficient and non-efficient portfolios. The CML is considered superior in measuring risk factors, while the SML shows the expected returns of individual assets. The market portfolio and risk-free assets are determined by the CML, while all security factors are determined by the SML.

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CML stands for Capital Market Line and SML bases for Security Market Line. The CML is a line that is used to demo the rates of return, which depends on riskless rates of return and degrees of hazard for a specific portfolio. SML which is besides called a Characteristic Line is a graphical representation of the market’s hazard and return at a given clip. One of the differences between CML and SML is how the hazard factors are measured. While standard divergence is the step of hazard for CML, Beta coefficient determines the hazard factors of the SML. The CML measures the hazard through standard divergence or through an entire hazard factor. On the other manus, the SML measures the hazard through beta which helps to happen the security’s hazard part for the portfolio.

While the Capital Market Line graphs define efficient portfolios, the Security Market Line graphs specify both efficient and non-efficient portfolios. While ciphering the returns the expected return of the portfolio for CML is shown along the Y-axis. On the contrary, for SML the return of the securities is shown along the Y-axis. The standard divergence of the portfolio is shown along the X-axis for CML whereas the Beta of security is shown along the X-axis for SML. Where the market portfolio and hazard-free assets are determined by the CML all security factors are determined by the SML. Unlike the Capital Market Line, the Security Market Line shows the expected returns of single assets. The CML determines the hazard or returns for efficient portfolios and the SML demonstrates the hazard or return for single stocks. Well, the Capital Market Line is considered to be superior when mensurating the hazard factors.

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Summary:

1. The CML is a line that is used to demo the rates of return, which depends on riskless rates of return and degrees of hazard for a specific portfolio. SML which is besides called a Characteristic Line is a graphical representation of the market’s hazard and return at a given clip.
2.  While standard divergence is the step of hazard in CML, Beta coefficient determines the hazard factors of the SML.
3.  While the Capital Market Line graphs define efficient portfolios, the Security Market Line graphs specify both efficient and non-efficient portfolios.
4. The Capital Market Line is considered to be superior when mensurating the hazard factors.

Where the market portfolio and hazard-free assets are determined by the CML all security factors are determined by the SML.

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Difference Between CML and SML. (2016, Dec 08). Retrieved from

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