What is the definition of Security Market Line, or SML?

The Security Market Line, or SML, is a line on a chart derived from the Markowitz Portfolio Theory. The Security Market Line is a graphical representation of the Capital Asset Pricing Model and it plots levels of risk against the expected return of the entire market at a given point in time.

Going by values of beta, the security market line shows that the relationship between risk and return is linear for individual securities (i.e. increased risk = increased return). Essentially it shows what return you need to earn on an investment in order for it to be worth taking, and this increases with the riskiness of the investment.

The formula for the Security Market Line is:

• Required Return = Risk Free Rate + ( Beta x [Market Return - Risk Free Rate])