Security market line (SML)
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The CAPM equation plotted as expected return versus beta.
Security market line (SML) in plain English
The Security Market Line is a simple graph that answers: 'given how risky this investment is, what return SHOULD I expect?' It plots expected return going up as risk (measured by 'beta', how much an investment swings when the whole market swings) goes right — a straight, rising line. The idea is fair pay for risk: take on more market risk, and the line says you should be rewarded with proportionally more return. If a real investment sits above the line it's a bargain (paying more than its risk warrants); below the line, it's overpriced.
Also called: SML
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