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# CML, SML, Portfolio

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A friend in finance shows you the following two figures (see the attached file). He asks you a few facts about them. S represents the safe asset. M represents the market portfolio.
a) What is the name of the line segment between S and M in Figure 1?
b) What is the name of the line segment between S and M in Figure 2?
c) How can one achieve a portfolio with the characteristics of point B in Figure 1?
d) Point X and point X' are meant to represent common stock of ABC. In figure 1, ABC appears to be riskier than the market portfolio. In figure 2 it appears to be safer. Is there something wrong with the two figures? If so, explain why ABC cannot appear as shown. If it is possible that the two figures are correct, explain what must be true about ABC to cause its representation to be in such a different location in the two graphs.

Please see the attached file.

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https://brainmass.com/economics/risk-analysis/cml-sml-portfolio-75974

#### Solution Preview

a) The name of the line segment between S and M in Figure 1 is CAPITAL MARKET LINE (CML)

b) The name of the line segment between S and M in Figure 1 is SECURITY MARKET LINE (SML)

c) The portfolio B is obtained by lending part of the portfolio at the risk-free rate (RFR) which is S and investing the remainder in the market portfolio M.

All portfolios to the left of M in Figure 1 (like B) are obtained by lending part of the portfolio at S and investing the remainder in M

All ...

#### Solution Summary

Questions related to capital market line and security market line, market portfolio have been answered.

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