CML vs CAL vs SML

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Black Swan

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okay, so time for a refresher on this if anyone wants to post a quick summary. So far I remember cml and aparently cal are both return based on variance while sml from the capm is based on beta. I also believe I remember that cml is cal combined with the rf asset. Wasn’t there a specification for the line/curve that denoted an investors individual portfolio? And also does this mean cal is all risky assets? Also, what’s the requirement for a portfolio to lie on both the cml and sml?
 
been lurking too long so i will try to help out… CAL the line is tangent to the efficient portfolio to each individual investor whereas CML is where all investors agree on the expected returns, std dev and correlations of all assets.
Formulas for expected returns are similar but for CAL they use e(Rt) and CML uses e(Rm).
 
When the risk free asset is added to the efficient frontier you get the CAL and CML.
CML = CAL for the entire market, assuming everyone has the same mean variance expectations ( E(R), variences, correlations).
CAL is just the CML for individual investors.
CAL and CML are both combine the risk free asset with the optimal portfolio, only with CML that optimal portfolio is the market portfolio (tangency point of CML).
Slope of CML = Sharp ratio
SML is the graph of the CAPM. Slope = MRP = E(Rm) - Rf
Securities plot above SML if they are underpriced, under SML if they are overpriced.. etc
 
gotcha I had some of that but just really felt a refresher was in order, I’m increasingly forgetting the basics as I focus on the advanced topics lately.
 
use the cal to determine the investor’s allocation between the risk free asset and the optimal risky portfolio.
use sml to find expected returns of securities.
 
Mcleod has it pretty good
difference between cal and cml is that cal includes a risky asset and risk free versus cml in which all investors use the market portfolio as the risky asset-basically based on markowitz’s assumptions
I think though that slope for SML is beta and for cml is Sharpe ratio
 
McLeod81 Wrote:
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>
> SML is the graph of the CAPM. Slope = MRP = E(Rm)
> - Rf
Slope of SML is beta.
In addition to the above mentioned points you might want to remember the following:
1. Beta for a SML can be obtained from the market model, that is by regressing the historical stock and market return.
2. Another common difference is CML and CAL both use standard deviation as the risk measure. SML uses systematic risk.
3. Efficient frontier and minimum variance frontier are two different things.
 
kabhii has another valid point
cml and cal use total risk
sml uses only systematic risk because you should not be rewarded for risk that you can eliminate by diverisfying
 
kabhii..
I don’t think beta is the slope, the slope is the MRP as florinpop said..
 
^^ beta is just the measure of systematic risk..
Another point:
Slope of the CML = Sharpe Ratio[ ER(m) - R(f) ]/ Market Std. Dev
 
mumukada Wrote:
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> kabhii..
>
> I don’t think beta is the slope, the slope is the
> MRP as florinpop said..
Sorry, got it wrong. Beta is the X-axis so it can’t be the slope.
Beta is the slope in market model and risk premium is the slope in CAPM.
 
kabhii Wrote:
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> 3. Efficient frontier and minimum variance
> frontier are two different things.
Efficient frontier is the minimum variance frontier from the global minimum variance portfolio on upward (positively sloped portion). All portfolios below the global minimum variance portfolio are dominated by other portfolio on the E.F.
 
CAL and CML is pretty much the same except CAL says tangency portfolio includes all risky asset and CML says it’s the optimal/efficint portfolio which is the market portfolio like S&P. Same intercept but different slope.
Correct me if I were wrong.
 
tom18606 Wrote:
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> CAL and CML is pretty much the same except CAL
> says tangency portfolio includes all risky asset
> and CML says it’s the optimal/efficint portfolio
> which is the market portfolio like S&P. Same
> intercept but different slope.
>
> Correct me if I were wrong.
Wrong. CAL also has risk-free asset not just all risky assets.
Anish
 
tom18606 Wrote:
——————————————————-
> CAL and CML is pretty much the same except CAL
> says tangency portfolio includes all risky asset
> and CML says it’s the optimal/efficint portfolio
> which is the market portfolio like S&P. Same
> intercept but different slope.
>
> Correct me if I were wrong.
Also, the market portfolio used in the CML theoretically contains ALL risky assets (ALL stocks, real estate, etc etc etc). The S&P 500 is a large cap blend portfolio and not even close to the market portfolio.
 
Anish,
Rf is the intercept.
Mcleon, I just put S&P as a sample not the actual portfolio or risky assets. Also, in the real world, what would you use as a market proxy?
Thanks
 
tom18606 Wrote:
——————————————————-
> Anish,
>
> Rf is the intercept.
yes it is the intercept of the CAL - depicting a portfolio that has all assets invested in the risk free rate, if it lies on the intercept that is..
>
> Mcleon, I just put S&P as a sample not the actual
> portfolio or risky assets. Also, in the real
> world, what would you use as a market proxy?
>
> Thanks
 
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