Security Market Line

The Security Market Line (SML) is a graphical representation used in finance to show the relationship between the expected return of an investment and its risk, measured by beta (which indicates how much the investment's price moves compared to the market). The SML helps investors assess whether an investment offers a fair return for its level of risk. Investments above the SML are considered undervalued (offering higher returns for the risk) while those below are seen as overvalued (offering lower returns for the risk). Essentially, it's a tool for evaluating the risk-reward trade-off of various investments.