SML and CML Comparison The beta coefficient of an asset can be expressed as a function of the asset's correlation with the market as follows: ANO a. Substitute this expression for beta into the Security Market Line (SML), equation below. SML: TRE + ( r u b = + (RPM) This results in an alternative form of the SML Pava 1. - 1 + (n . ) 11. n = + (n + Rp) III. n - RF+ ( RF) IV. + (new) The correct equation Sale b. Compare your answer the Capital Market Line (CML), equation below. CML: y = "RE + V What similarities do you observe? What conclusions can you drawn? When in this form, the CML and SML The measure of risk in the art is on the measure of risk in the Bis positively correlated with the market. , and is than for all assets except those which are perfectly SML: = TRE M IUI This results in an alternative form of the SML. ANO 1. n = TRF + (TRF-TM) OM PINO II. n = TRF + (M + TRE) OM PNO III. n = rre+ (OM - TRE) OM IV. n = r + (rm - FRF) OM The correct equation is -Select- b. Compare your answer to part a with the Capital Market Line (CML), equation below. CML: fp = TRF + ( FRF), What similarities do you observe? What conclusions can you drawn? When in this form, the CML and SM -Select- have the same market price of risk The measure of risk in the -Select- define only efficient portfolios the -Select- Dis Dimol, a positively correlated with the market. PIN III. n = TRF + (TM - PRF) on PIMO IV. n = rm + (TM - TRE) ON The correct equation is -Select- b. Compare your answer to part a with the Capital Market Line (CML CML: fp = trf +(ORF), What similarities do you observe? What conclusions can you drawn When in this form, the CML and SML-Select- -Select- ) is op. The measure of risk in The measure of risk in th positively correlated with SML ket Line (CML), equation below. s can you drawn? measure of risk in th is PiMoi, and is -Select- tha -Select- CML SML Grade It Now Save & Continue Continue without saving ct- bis Pimoj, and V -SNC- than for all assets ex less more Be it Now Save