What's new

CAPM in FRM part I book 1 - CML vs SML

MagnusNordzell

New Member
Subscriber
Thread starter #1
Hi all,

reading the FRM part I book 1 on CAPM (p. 75) I noticed that the text refers to the relationship between beta and expected return as the Capital Market Line. To me this is wrong as what they are describing is the Security Market Line. There is an important distinction between the two as the CML refers to total risk measured by the standard deviation, i.e. including specific (diversifiable) risk.

Anyone agrees with me?

Magnus
 

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
#2
Hi @MagnusNordzell Yes, we agree. Please see my post here https://www.bionicturtle.com/forum/threads/problems-in-garps-2020-frm-material.23011/post-80349 i.e.,
  • [FRM-5 Foundations] The text goofs the CML saying, "Figure 5.2 shows the capital market line, defined as the linear relationship between the expected rate of return and systematic risk." However, is the security market line (SML) that plots return against beta; aka, systematic risk; the capital market line (CML) plots against standard deviation (aka, total risk, volatility). I have a video on this topic here https://www.bionicturtle.com/forum/...ne-cml-versus-security-market-line-sml.21443/

 
Top