- The capital market line (CML) depicts portfolios that have the best risk-reward ratio. It's a theoretical notion that encompasses all portfolios that combine the risk-free rate of return and a market portfolio of hazardous assets in the most optimal way.
- All investors will take a position on the capital market line, in equilibrium, by borrowing or lending at the risk-free rate, because this optimises return for a given degree of risk, according to the capital asset pricing model (CAPM).
- The capital market line (CML) depicts portfolios that have the best risk-reward ratio.
- The capital allocation line (CAL) is a specific instance of the CML in which the risk portfolio is the market portfolio. As a result, the Sharpe ratio of the market portfolio equals the slope of the CML.
What do you understand by capital market line?
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