Security Market Line [SML]

Under the CAPM, if we plot the relationship between an asset’s expected return against its systematic risk, we should get a straight line, where if the asset’s beta is 0, it is considered risk-free and the expected return is the risk-free rate.  If the asset’s beta is 1, this means the asset has same systematic risk as that of the market, so we should expect a return that is same as the market.  If beta is below 1, the expected return is lower than the market, and if beta is above 1, the expected return is greater than that of the market.  This line is known as the security market line.