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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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Solution Summary

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

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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 ...

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