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Introduction to Capital Market Line

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What is the capital market line? Who uses it? Would you use it? Who discovered it? How does the capital market line relate to the security market line?

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Capital market line (CML) is the tangent line drawn from the point of the risk-free asset to the risky assets (i.e. market portfolio lies in the optimal risk-return point, with risk being defined as the portfolio's standard deviation). In practice, the U.S. government Treasuries is considered as the risk-free assets while broad equity market index such as S&P 500 is a common proxy for risky assets .

The CML is a fundamental concept in financial studies, and is widely used ...

Solution Summary

Introducing the Capital Market Line, with an explanation of its function, relation to the Modern Portfolio Theory and CAPM.