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: PiMoi bi OM a. Substitute this expression for beta into the Security Market Line (SML), equation below. SML: ri = IRF + (rM - PRF)b; = PRF + (RPM)b; This results in an alternative form of the SML. Pim I. ri = TRF + (rm - PRF) OM Pimi II. ri = PRF + (rm + TRF) OM PiM III. ri = RF + (rRF-IM) OM Pimi IV. = rm + (rM - PRF) OM The correct equation is -Select- FM-TRF) Op b. Compare your answer to part a with the Capital Market Line (CML), equation below. CML: PR What similarities do you observe? What conclusions can you drawn? When in this form, the CML and SML have the same market price of risk TRF + (m OM -Select- is Pinoi, and is -Select- than for all assets except those which are The measure of risk in the -Select- vis Op. The measure of risk in the perfectly positively correlated with the market