Capital Market Line

Presented By , Nishi Rani 123

Introduction
Capital market line (CML) is a line intersecting returns on norisk investments and returns on the entire market. The difference between capital market line and efficient frontier, is that the capital market line includes no-risk investments. Capital market line is used to evaluate portfolio performance. All portfolios along the capital market line are efficient portfolios. Any point below any other point on the line deliver lower returns so the investors are advised should not invest but the same risk . CML is a graph employed in asset pricing models to depict rate of return in a market portfolio . Capital market line describes rate of return for efficient portfolios that are dependent on level of risk and risk free rate of return for a specific portfolio.

 CML originates from the assumption that all investors will possess market portfolio. Quantum of risk is positively correlated to the expected return . Capital market line is deduced by drawing a tangent line that starts from the intercept point located on efficient frontier and extends to the point where expected return matches risk free rate of return. Capital market line is believed to be a better measure than efficient frontier as it takes into consideration risk free asset in a portfolio. All points on the CML have better risk-return profiles when compared to any portfolio located on efficient frontier.

 Any point below any other point on the line deliver lower returns so the investors are advised that one should not invest at same risk CML can be calculated by this formula :

Where :E(r) is the expected return on portfolio Rf is the risk free return Where it is given that market portfolio has an expected return of E(rM) and standard deviation of M.