Securities Market Line

The Securities Market Line (SML) is a graphical representation in finance that shows the relationship between expected return and risk of investments. It uses the Capital Asset Pricing Model (CAPM) to illustrate that higher risk investments should provide higher potential returns. On the SML, the x-axis represents risk (measured by beta, which reflects volatility compared to the market), while the y-axis shows expected return. Investments above the line are considered undervalued (offering good returns for their risk), while those below are overvalued. The SML helps investors assess whether a security is a worthwhile investment based on its risk-return profile.