Show security market line, Risk Management

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Q. Show Security market line?

The CML represent the equilibrium relation between the expected return and standard for efficient portfolio. But it does not indicate how individual assets are price in a security market although it is understandable that the securities price move across the portfolio as suggested by the CML it is highly abstract to use such price change for any realistic investment decision. Therefore another appropriate measure is needs to evaluate the risk return the trade off for individual securities.

In case of the individual security the total risk is irrelevant as a portion of it can be diversifies away hence the relevant risk is the systematic risk and the market is expected to be provided a reward for bearing the systematic alone.

W.F Sharpe is able to provide a measure for evolution the systematic risk by his famous beta concept it is a measure of the risk that applies to all assets and portfolio whether efficient or inefficient.


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