Capital Market Line
The Capital Market Line (CML) is the straight line on a risk-return plot showing the set of efficient portfolios formed by combining a risk-free asset with the market portfolio. Its slope equals the market portfolio’s Sharpe ratio, and it is tangent to the efficient frontier of risky assets.
Example: An investment advisor describes a portfolio consisting of 60% in the market portfolio and 40% in the risk-free asset as lying on the Capital Market Line, illustrating the linear trade-off between higher expected return and higher risk.
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