# Security Market Line (SML) Definition and Characteristics.

The security market line (SML) is a graphical representation of the relationship between a security's expected return and its risk. The SML is used to determine whether a security is undervalued or overvalued.

The SML is represented as a straight line on a graph with the y-axis representing expected return and the x-axis representing risk. The SML is determined by the following equation:

Expected return = Risk-free rate + Beta x (Market return - Risk-free rate)

where:

Risk-free rate = The return on a risk-free investment

Beta = A measure of a security's volatility in relation to the market

Market return = The return on the market as a whole

The SML can be used to determine whether a security is undervalued or overvalued. If the expected return on a security is greater than the return indicated by the SML, then the security is undervalued. If the expected return on a security is less than the return indicated by the SML, then the security is overvalued.

#### How do you calculate CML?

There are a few different ways to calculate the CML, but the most common method is to use the Capital Asset Pricing Model (CAPM).

The CAPM model is used to calculate the "expected return" of an investment, which is the return that the investor expects to receive, on average, over the long term.

The CAPM model takes into account two factors:

1) The risk-free rate of return: This is the return that an investor could expect to receive if they invested in a "risk-free" asset, such as a government bond.

2) The market risk premium: This is the additional return that an investor could expect to receive, on average, for taking on the risk of investing in the stock market.

The formula for the CAPM model is:

Expected return = Risk-free rate + (Market risk premium * Beta)

Where:

Beta is a measure of the volatility of an investment in relation to the overall market. A beta of 1.0 means that the investment is just as volatile as the market. A beta of 2.0 means that the investment is twice as volatile as the market, and a beta of 0.5 means that the investment is half as volatile as the market.

So, using the CAPM model, the expected return of an investment can be calculated as:

Expected return = Risk-free rate + (Market risk premium * Beta)

For example, if the risk-free rate is 2%, the market risk premium is 6%, and the beta of the investment is 1.5, then the expected return of the investment would be:

Expected return = 2% + (6% * 1.5)

Expected return = 12%

The CML is then calculated by plotting the expected return of the investment (x-axis) against the beta of the investment (

#### What are the 5 types of security?

There are five main types of security:

1. Debt securities: These are securities that represent a loan that must be repaid by the issuer, with interest. Common examples include bonds and treasury bills.

2. Equity securities: These are securities that represent ownership in a company. Common examples include stocks and mutual funds.

3. Derivatives: These are securities that derive their value from underlying assets. Common examples include futures, options, and swaps.

4. Commodities: These are physical goods that can be traded. Common examples include gold, oil, and wheat.

5. Real estate: This is property that can be bought and sold. Common examples include commercial property, land, and residential property. What are the 4 basics of technical analysis? The four basics of technical analysis are:

1. Identifying support and resistance levels
2. Identifying trend lines
3. Identifying candlestick patterns
4. Identifying chart patterns

#### What are types of security?

There are many types of securities, but the two most common are equity securities and debt securities. Equity securities represent ownership in a company, while debt securities are essentially loans that must be repaid with interest. Other types of securities include derivative securities, which are based on the value of another security, and hybrid securities, which are a combination of equity and debt.

#### What is the CAPM line?

The Capital Asset Pricing Model (CAPM) is a tool used by financial analysts to predict the expected return of an investment based on its level of risk. The model is based on the premise that investors require a higher return on investments with higher levels of risk. The CAPM line is a graphical representation of this relationship, with the x-axis representing the level of risk and the y-axis representing the expected return.