Capital market line CML is the tangent line drawn from the point of the risk-free asset to the feasible region for risky assets. The tangency point M represents the market portfolio , so named since all rational investors minimum variance criterion should hold their risky assets in the same proportions as their weights in the market portfolio.

The CML results from the combination of the market portfolio and the risk-free asset the point L. All points along the CML have superior risk-return profiles to any portfolio on the efficient frontier , with the exception of the Market Portfolio, the point on the efficient frontier to which the CML is the tangent.

From a CML perspective, the portfolio M is composed entirely of the risky asset, the market, and has no holding of the risk free asset, i.

All of the portfolios on the CML have the same Sharpe ratio as that of the market portfolio, i. A stock picking rule of thumb is to buy assets whose Sharpe ratio will be above the CML and sell those whose Sharpe ratio will be below. Indeed, from the efficient market hypothesis it follows that it's impossible to beat the market. Therefore, all portfolios should have a Sharpe ratio less than or equal to the market's. In consequence, if there is a portfolio or asset whose Sharpe ratio will be bigger than the market's then this portfolio or asset has a higher return per unit of risk i.

This abnormal extra return over the market's return at a given level of risk is what is called the alpha. From Wikipedia, the free encyclopedia.

Capital market line - Wikipedia

Retrieved 15 May Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock.

Authorised capital Issued shares Shares outstanding Treasury stock. Broker-dealer Day trader Floor broker Floor trader Investor Market maker Proprietary trader Quantitative analyst Regulator Stock trader.

Electronic communication network List of stock exchanges Opening times Multilateral trading facility Over-the-counter. Alpha Arbitrage pricing theory Beta Bid—ask spread Book value Capital asset pricing model Capital market line Dividend discount model Dividend yield Earnings per share Earnings yield Net asset value Security characteristic line Security market line T-model.

Algorithmic trading Buy and hold Concentrated stock Contrarian investing Day trading Dollar cost averaging Efficient-market hypothesis Fundamental analysis Growth stock Market timing Modern portfolio theory Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory Random walk hypothesis Sector rotation Style investing Swing trading Technical analysis Trend following Value investing. Block trade Cross listing Dark liquidity Dividend Dual-listed company DuPont analysis Efficient frontier Flight-to-quality Haircut Initial public offering Margin Market anomaly Market capitalization Market depth Market manipulation Market trend Mean reversion Momentum Open outcry Public float Public offering Rally Returns-based style analysis Reverse stock split Share repurchase Short selling Slippage Speculation Stock dilution Stock market index Stock split Trade Uptick rule Volatility Voting interest Yield.

Retrieved from " https: Navigation menu Personal tools Not logged in Talk Contributions Create account Log in.

Capital Market Line (CML)

Views Read Edit View history. Navigation Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store.

Interaction Help About Wikipedia Community portal Recent changes Contact page. Tools What links here Related changes Upload file Special pages Permanent link Page information Wikidata item Cite this page. This page was last edited on 15 May , at Text is available under the Creative Commons Attribution-ShareAlike License ; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy.

Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Cookie statement Mobile view.