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7 Cards in this Set
- Front
- Back
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CML equation
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=RFR + SDportfolio[(ERmarket - RFR)/SDmarket]
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Lending and borrowing portfolio
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The market portfolio (M) occurs where the CML touches Efficient frontier at one point. Portfolios to the left of M are lending portfolios. Portfolios to the right of M are borrowing portfolios.
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The Market portfolio (M)
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The market portfolio consists of all stocks, bonds and risky assets in existence since all assets must be held by someone. The market portfolio is completely diversified.
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Systematic risk
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Cannot be diversified. Investors must be compensated for systematic risk, however are not compensated for unsystematic risk as it can be diversified away for free.
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CML vs SML
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CML uses total risk (SD portfolio) on the X axis, therefore only efficient portfolios plot on the CML.
The SML uses beta (systematic risk) on the X axis, therefore, all properly priced securities fall on the SML. |
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Undervalued securities
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Fall above the SML as their expected return is greater than their required return (CAPM, SML)
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Overvalued securities
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Fall below the SML as their expected return is less than their required return (CAPM, SML)
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