Listing Category: Portfolio Management and Wealth Planning

CAL vs. CML vs. SML

The Capital Allocation Line (CAL), Capital Market Line (CML), and Security Market Line (SML) can be confused easily, and for good reason: the graphs look virtually identical, the assumptions under which they are constructed are essentially the same, and their implications are similar. We’ll characterize each one and try to eliminate the confusion.


It is not surprising that many CFA candidates (at all levels, not just Level I) have a poor understanding of beta, because a survey of a number of financial websites with glossaries (not the little, obscure ones; the big boys, such as Charles Schwab, Citibank, Deutsche Bank, E-Trade, Investopedia, Putnam Investments, TD Ameritrade, and others) finds that about 80% of them give an incorrect definition or interpretation of beta. If the people who are already supposed to understand this stuff get it so wrong, it’s a small wonder that the people who are just learning it have such a hard time.