Capital Market Line Equation

The Capital Market Line (CML) represents the best possible combination of risk and return for an investment portfolio by combining a risk-free asset and the market portfolio. Its equation shows the expected return of a portfolio based on its total risk (measured by standard deviation). In simple terms, it illustrates how much return an investor can expect for taking on a certain level of investment risk, with higher risk leading to higher expected returns. The line starts at the risk-free rate (no risk, no return) and slopes upward toward the market portfolio, indicating increasing return with increased risk.