Capital Market Line

The capital market line (CML) is a capital allocation line (CAL) provided by one-month T-bills as a risk-free asset and a market index portfolio like Dow Jones. Standard and Poor’s and N’YSE, as the risky asset. It is one of the two element of the CAPM the other being the security market line (SML). All investors end up somewhere alone the CML. The CML indicates

(i) The focus of all efficient portfolios (those plotting along CML), to all securities and portfolios lie along the CML.
(ii) Risk-return relationship and measure of risk for efficient portfolios.

(iii) The appropriate measure of risk for the portfolio is standard deviation of returns on portfolios:
(iv) The relationship between risk (standard deviation) and expected return for efficient portfolios is linear.

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