Capital market quota (CML):

The intercept point is equal to the line of risk-free interest rate tangent to the effective boundary of risky assets; Represents the effective boundary when risk-free assets can be used for investment.

The capital market line is the ray of risk-free rate of return, which shows the linear relationship between the expected rate of return and the standard deviation of effective portfolio. It is tangent to the effective boundary of the portfolio, and it is a portfolio composed of risky assets and risk-free assets.

Stock market line (SML):

The graphical representation of CAPM shows that the X axis is beta and the Y axis is expected return. The intercept is Rf and the slope is the market risk premium (Rm-Rf).

The stock market line represents CAPM, the X axis represents systemic risk β, and the Y axis represents expected return.

The intersection of the stock market line and the vertical axis is the risk-free rate of return, and the slope is the risk premium of the market. The stock market line can represent a stock or a portfolio. The stock market line measures whether the expected returns of different securities are reasonable under a certain β risk.

Stock market line (SML)

Any asset or portfolio is an appropriately priced plot of SML;

Any asset or portfolio priced higher than SML;

Any asset or portfolio priced below SML;

The vertical position of each security (asset or portfolio) represents the expected return, so this point falls above the stock market line, indicating that the expected return is greater than the required rate of return, so it is undervalued and can be bought, otherwise it is recommended to sell. The point just falling on the SML line indicates that it is in reasonable pricing and should adopt a neutral attitude.

The difference between capital market line and securities market line

(1) The horizontal axis of "capital market line" is "standard deviation (total risk)" and the horizontal axis of "securities market line" is "beta coefficient (systemic risk only)";

(2) The "capital market line" reveals the relationship between risk and return under the condition of "holding different proportions of risk-free assets and market portfolio"; The "securities market line" reveals the corresponding relationship between "risks and returns of securities themselves";

(3) The function of stock market line is to provide "necessary rate of return", and the intrinsic value of stock can be calculated by stock valuation model; The function of capital market line is to determine the proportion of investment portfolio, how much risk can be expected to bear and what kind of income can be obtained;

(4) The capital market line includes all effective portfolios, and only reasonably priced securities or portfolios can just be on the stock market line;

(5) The slope of the capital market line is market portfolio's Sharp ratio, while the slope of the securities market line is the risk premium of the market;

For example, when comparing the portfolio on the stock market line (SML) and the capital market line (CML), which is the most accurate state of the portfolio in SML:

A. There is only system risk, and the total risk is a risk measure on CML.

B. Not necessarily diversified, but the portfolio on CML is diversified.

C not necessarily priced at their equilibrium values, but portfolios located on CML are priced at their equilibrium values.

Answer: b

Analysis: Although the risk measure on the capital market chart is total risk, all the portfolios located on CML are scattered, with only systematic risk. This is because the portfolios on CML are composed of risk-free assets and (fully diversified) market portfolios. Any portfolio, including a single security, will be drawn along a balanced SML. Their non-systematic risk may be great, but it is not measured on the SML chart because it has nothing to do with the expected return. Both CML and SML reflect the relationship when the price is balanced.

(This information is from Gao Dun CFA Institute: /zhinan/aboutcfa.html).