Finance

  The Equilibrium Return-Risk Tradeoff: Given the previous analysis, we can now derive some predictions concerning equilibrium expected returns and risk. On an overall basis, we need an equilibrium model that encompasses two important relationships.  The capital market line specifies the equilibrium relationship between expected return and risk for efficient portfolios.  The security market line specifies the equilibrium relationship between expected return and systematic risk. It applies to individual securities as well as portfolios. THE CAPITAL MARKET LINE: The capital market line (CML) represents portfolios that optimally combine risk and return.  Capital asset pricing model  (CAPM), depicts the trade-off between risk and return for efficient portfolios. It is a theoretical concept that represents all the portfolios that optimally combine the  risk-free rate of return  and the market portfolio of risky assets. Under CAPM, all investors will choose ...