CML vs CAL vs SML

tom18606 Wrote:
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> 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
Wilshire 5000, Russell 3000
 
The whole purpose of showing CAL, CML and SML is to show much extra risk adjusted return you can earn (sharp ratio) per unit of risk. Rf is guaranteed anyway. So don’t worry about it when we speak about risk adjusted return.
You and I can get different CAL (because you and I might have different expected return and variance expectations). So CAL is a base for CML and CAPM. Plus CML may be different in real world based on what is ur market proxy. But if everybody uses same market proxy and same expected retun and variance for that market proxy, everybody gets the same CML. When you see market risk premium, where does it come from? Which market proxy we used?
CAL concept leads to CML, which leads to SML (CAPM). Same concepts but different proxies. Plus mean variance arc is left upward sloping.
I am done…..lol
 
I am giving this one a “bump” because its an excellent summary and I always get CAL, CML and SML mixed up.
 
Thanks MJLU! .. If you come across any thread for Active Risk and Active Return then do bump it!
 
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