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CML Vs SML: Facts Sheet

CML and SML are models for calculating expected returns of risky assets. CML uses total risk measured by standard deviation to calculate expected return, while SML uses systematic risk measured by Beta. Both models assume a risk-free asset and calculate whether securities are overvalued or undervalued based on their expected returns. The key differences are that CML graphs expected return against total risk on the x-axis, while SML graphs it against Beta, and CML uses the Sharpe ratio for the slope while SML uses the Treynor ratio.

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33 views

CML Vs SML: Facts Sheet

CML and SML are models for calculating expected returns of risky assets. CML uses total risk measured by standard deviation to calculate expected return, while SML uses systematic risk measured by Beta. Both models assume a risk-free asset and calculate whether securities are overvalued or undervalued based on their expected returns. The key differences are that CML graphs expected return against total risk on the x-axis, while SML graphs it against Beta, and CML uses the Sharpe ratio for the slope while SML uses the Treynor ratio.

Uploaded by

jackadams
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CML vs SML

Facts sheet

LETS TAKE A LOOK.


CML

SML

Common assumptions
Present in both
CML and SML

Formed with a risk-free and risky


asset(s)
Risk free asset has no risk.
Any investor can lend or borrow
money at the risk free rate
A return generating model

Formed with a risk-free and risky


asset(s)
Risk free asset has no risk.
Any investor can lend or borrow
money at the risk free rate
A return generating model

Objective

Calculates expected return


based on total risk and
indicates overvaluation or
undervaluation of
securities

Calculates expected return


Based on systematic risk
(Beta) and indicates
overvaluation or
undervaluation of
securities

GRAPH

Expected return on Y axis,


Stdev on X axis

Expected return on Y axis,


Beta on X axis

SLOPE

SHARPE ratio

TREYNOR ratio

Equation

E(r)= Rf + (Rm-Rf)*TOTAL
risk (standard deviation)

E(r)= Rf + (RmRf)*Systematic risk (Beta)

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