Individual stocks will plot below the
CML
What is CML?
CML stands for
efficient frontier
, which plots predicted return and overall risk for portfolios made up of a mix of market and risk-free asset holdings. Risk/return combinations for certain securities will follow the SML but not the CML if markets are in
equilibrium
. Because unsystematic risk is diversified away in market portfolios, the risk-return combinations for individual securities will fall below CML.
The capital marKet line (CML) depicts portfolios that balance risk and return 4i444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444]
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In a plot of expected return on standard deviation of returns
C. Individual stocks will plot below the CML
What is CML?
The capital market line (CML) is the portfolios that optimally combine risk and return. It is a theoretical concept that represents all the portfolios that optimally combine the risk averse rate of return and the market portfolio of assets that are risky. In capital asset pricing model (CAPM), investors will choose a position on the capital market line, by borrowing and or lending at the risk-free rate, since this can maximize return for a given level of risk. CML shows portfolios that effectively combine risk and return. The point of intersection of CML and efficient frontier result in the most efficient portfolio known as the tangency portfolio.
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