Securities market line

The securities market line (SML) graphs the relationship between risk and return.

The securities market line is a straight line. It touches the efficient frontier and passes though the risk free rate of return.

The SML lies above the efficient frontier, except at the one point where it touches. This shows that the availability of a risk free asset improves the returns available for a any given level of risk and vice-versa.

The point at which the securities market line touches the efficient frontier shows the risk and return on the market portfolio.

According to modern portfolio theory it is not possible to construct a portfolio that lies above the securities market like — no portfolio can give a better return for the same level of risk than one that lies on the securities market line.

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