Question

Draw the SML graph, and indicate the region where you can find the most attractive investments. Also indicate the area where the least attractive investments are located. Be sure to label the axes and other parts of the graph.

Answer 1

The Security Market line is mainly used in CAPM model of portfolio management and it denotes, the level of expected returns with the undiversifieble risk or systematic risk.

In SML we have

X axis = Systematic risk

Y axis is = Er or expected return.

All the portfolios on the SML line shows the optimal portfolio with risk return trafeoff.

So if any asset falls above the SML , we see that it have

Higer Return with same level of systematic risk

And Any asset who which falles below SML have

Lower return than expected at same level of risk.

.

Thus portfolio or assets above the sml Are ATTRACTIVE INVESTMENT.

While the portfolio or Assets at the bottom most of the graph are least attractive investment.