Editing Capital asset pricing model (section)

==Security market line==
The [[Security market line|SML]] graphs the results from the capital asset pricing model (CAPM) formula. The ''x''-axis represents the risk (beta), and the ''y''-axis represents the expected return. The market risk premium is determined from the slope of the SML.

The relationship between β and required return is plotted on the ''security market line'' (SML), which shows expected return as a function of β. The intercept is the nominal risk-free rate available for the market, while the slope is the market premium, E(''R''<sub>''m''</sub>)−&nbsp;''R''<sub>''f''</sub>. The security market line can be regarded as representing a single-factor model of the asset price, where β is the exposure to changes in the value of the Market. The equation of the SML is thus:

:<math> \mathrm{SML}: E(R_i)= R_f+\beta_i (E(R_M) - R_f).~ </math>

It is a useful tool for determining if an asset being considered for a portfolio offers a reasonable expected return for its risk. Individual securities are plotted on the SML graph. If the security's expected return versus risk is plotted above the SML, it is undervalued since the investor can expect a greater return for the inherent risk. And a security plotted below the SML is overvalued since the investor would be accepting less return for the amount of risk assumed.