Contents
Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
CAPM
Security Market Line
Bond Valuation
Stock Valuation
Cost of Capital
The Balance Sheet
Capital Budgeting
Hall of Fame
Credit Report
Forex
401K
ETFs
Futures
Inflation
IPOs
Mergers
Online Scams
Calculators
Financial Terms
Scientific Terms
Military Terms
Financial Charts
Unemployment
Fuel Mileage
Sports Finance
Energy Efficiency
Japanese
Chinese
हिन्दी
العربية
Espanol
Francias
Portuguese
Disclaimer




The Security Market Line


The formula for CAPM is Ks = Krf + B ( Km - Krf).

Let's assume that the risk free rate is 5%, and the overall stock market will produce a rate of return of 12.5% next year. You see that XYZ company (Read our disclaimer) has a beta of 1.7

I f you make a graph of this situation, it would look like this:

security market line image

  • On the horizontal axis are the betas of all companies in the market
  • On the vertical axis are the required rates of return, as a percentage

The red line is the Security Market Line.

How did we get it? We plugged in a few sample betas into the equation
Ks = Krf + B ( Km - Krf).

Security Beta (measures risk) Rate of Return
'Risk Free' 0.0 5.00%
Overall Stock Market 1.0 12.50%
XYZ Company 1.7 17.75%







About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

Copyright © 1997 - 2009 by Mark McCracken , All Rights Reserved