Security market line (SML)

Last updated: 16.03.2016

Security market line (SML) reveals the relationship between the level of systematic risk and the expected return and as such presents the outputs of Capital Asset Pricing Model (CAPM). The slope of the curve represents coefficient β. (42)

SML line is used to derive expected (= well priced) return for the considered level of systematic risk. However, the return increases with the level of risk.

 

(42)

The shares above SML are undervalued as they bring higher return than would be expected for the level of systematic risk. (42)

The shares below SML are overvalued as they bring lower return than would be expected for the level of systematic risk. (42)

 

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Used sources:

42. Security market line (online).  Citation date: 2.2.2016. Available from www: https://en.wikipedia.org/wiki/Security_market_line



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