Capital Market Line

Categories: Technical Analysis,

A graph relating risk (as represented by the market portfolio's beta) and the required return for the market portfolio. This is a positive, linear relationship that originates from the capital market Asset Pricing theory which states that all investors will own the market portfolio (as opposed to single securities). However, the amount of risk they will take on is positively correlated to expected return, where expected return = risk-free rate + portfolio beta * (the difference between the expected returnon the market as a whole and the risk-free rate).