CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

An upward sloping line in total risk-return space along which completely diversified portfolios plot, is called the ______.
A. security market line
B. efficient frontier
C. capital market line

User Contributed Comments 6

User Comment
Tawhid In case of Systematic Risk (Beta) - Return space , the upward sloping line is SML (Security Market Line)
chuong CML examines the TOTAL RISK while SML examines the SYTEMATIC RISK
ThePessimist CML also only examines systematic risk, since the portfolios are completely diversified and thus have no unsystematic risk.
uberstyle The CML examines the expected returns on efficient portfolios and their total risk (measured by standard deviation). The SML examines the expected returns on individual assets and their systematic risk (measured by beta). If the expected return-beta relationship is valid for any individual securities, it must also be valid for portfolios constructed with any of these securities. So, the SML is valid for both efficient portfolios and individual assets.

All properly priced securities and efficient portfolios lie on the SML. However, only efficient portfolios lie on the CML.
cwong2013 I think of it this way...

CAL is the most simple scenario where the total risk is considered and it is relating to the one (single) asset. To take this a step further, where there is a market of assets, this is referred as CML.

Then finally, the ideal situation where portfolio blend removes risks, you would look at the SML line where the x axis is the beta.

CAL, CML, SML- alphabetically makes sense also. This would be great way to remember the differences.
Kevdharr Thanks cwong2013. I've been having trouble keeping these straight, but that is an excellent way of remembering them.
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