Capital market line (CML)
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
In CAPM, the set of efficient portfolios formed by combining the risk-free asset with the tangency (market) portfolio.
Capital market line (CML) in plain English
Imagine you can split your money between two things: a super-safe savings account (the "risk-free asset") that pays a small guaranteed return, and one perfectly-diversified basket of all stocks (the "market portfolio"). The Capital Market Line is just the menu of the smartest ways to mix those two — from all-safe, to a blend, to all-stocks. It's called the *best* menu because for any level of risk you're willing to take, no other mix gives you more expected return. Think of it as a dial: turn it toward the savings account for calm and low reward, or toward stocks for more bounce and more expected reward.
Also called: CML
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