CML CAL SML

Question 1

What does the CAL show?

Answer 1

All possible risk-return combinations from combining a risky portfolio and a risk-free asset.

Question 2

What’s the difference between CAL and CML?

Answer 2

The CML is a special case of the CAL where the risky asset is the market portfolio. It shows only efficient portfolios.

Question 3

What risk measure does the CML use vs the SML?

Answer 3

CML uses standard deviation (total risk); SML uses beta (systematic risk).

Question 3

What does the SML show?

Answer 3

The expected return of an asset based on its beta using CAPM. It applies to both individual securities and portfolios.

Question 4

What does a point above the SML mean?

Answer 4

The asset is undervalued and offers a higher return for its level of risk.