When looking at high-risk investments, investors will want to offset those risks with higher returns. This way, investors can determine the correct pricing of a given investment. On the other hand, stocks or securities above the SML are considered to be undervalued. If an investment lies below the SML, then it suggests an overvalued stock or security. When doing so, investors can plot several investments on the graph. The security market line allows investors to evaluate an investment when evaluating various options. READ: Interest Rate Risk Management: Definition and Hedging Techniques How Does the Security Market Line Work? Similarly, it helps investors evaluate the opportunity cost of an investment by comparing the investment opportunity at market risk with a risk-free investment. By plotting all the information on a graph, the security market line allows investors to derive the pricing of risky securities and their expected returns. For a given security, the market risk premium is the plot point relative to the SML.ДЄnother name used for the security market line is the characteristic line. On its y-axis, it represents the expected growth. Along its x-axis, the chart shows the systematic risks. Usually, the market includes risky assets or a proxy. It allows them to consider the return from their selected portfolio of stocks against the market average. The SML is a critical visual representation for investors. Similarly, it graphs various levels of systematic risk of several securities against the expected return from the market. SML shows a visual representation of the expected returns from assets based on systematic risk. The Security Market Line (SML), theoretically, represents a line on a chart which is a graphical representation of the CAPM model. Through these, CAPM provides an expected rate of return to users. Apart from beta, it also considers the expected returns, risk-free returns, and market risk premium. For that reason, most companies and investors prefer using this model. Unlike some other models, CAPM considers the beta coefficient, which is a measure of systematic risk. Companies, on the other hand, can use it to derive the cost of equity. Usually, CAPM is a tool that investors use when calculating the expected returns for their stock investments. This model describes the expected return for assets and the systematic risk involved. The Capital Asset Pricing Model (CAPM) is a tool that investors and companies use when calculating the cost of capital. What is the Capital Asset Pricing Model (CAPM)?

How to plot sml