09 May HOW ARE THE CAPITAL MARKET LINE (CML) AND THE SECURITY MARKET LINE (SML) DIFFERENT?
1. How does the use of indifference curves help determine which portfolio an investor would choose on the efficient frontier? What do the indifference curves implies about an investor’s willingness to bear risk?2. How are the capital market line (CML) and the security market line (SML) different? What does each represent?The Modern Portfolio Theory allows an investor to place several different investments under one portfolio. This is what is also known as a Diversified Investment Portfolio. In the past portfolios were limited to one stock only. This did not allow the investor to pick and chose different investments he or she wanted to sell.MPT allows for diverse stocks to be included in the same portfolio thus allowing the investor to buy and sell at different times and allows them to decide which stock will show a better rate of return. The indifference cures will show over time which investment is doing better.The Capitol Market Line (CML) covers the particular rate of return on a single stock and the Security Market Line (SML) covers the rate of return covering the entire market.
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