Reference Work Entry

Encyclopedia of Finance

pp 46-46

Capital Market Line

The efficient set of all assets, both risky and riskless, which provides the investor with the best possible opportunities. The line used in the risk-return trade-off to illustrate the rates of return for efficient portfolios depending on the risk free rate of return and the level of risk (standard deviation) for a particular portfolio.

In sum, formula for capital market line used to describe the trade-off between expected return and total risk is
where Rf = risk-free rate, E(Rm) = expected return on the market portfolio, E(Ri) = expected return on the ith portfolio, and σi, σm = standard deviations of the portfolio and the market, respectively.
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