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Security Market Line (SML) Calculator

Estimate expected return using CAPM given beta, risk-free rate, and market return.

Security Market Line (SML)

CAPM expected return from beta, risk‑free rate, and market return.

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Guide

Using the Security Market Line for expected return estimation

  • The SML maps beta to expected return via CAPM. It's a benchmark for pricing systematic risk.
  • Deviations from the SML suggest alpha (positive or negative) or model misspecification.
  • Inputs should be annualized and consistent—use the same time horizon for risk‑free rate, market return, and beta estimation.
  • Compare realized returns to SML expectations to identify securities with positive or negative alpha.

Frequently Asked Questions

Security Market Line, CAPM, beta, and expected returns

What is the SML?

A line relating expected return to beta under CAPM, representing the relationship between systematic risk and expected return.

What inputs do I need?

Risk‑free rate, market expected return, and the security's beta to calculate expected return along the SML.

How do I interpret beta 1?

Matches market risk; expected return equals market expected return. Beta above 1 indicates higher systematic risk and expected return.

What if beta is negative?

Expect returns below the risk‑free rate if the market premium is positive. Negative beta assets move opposite to the market.

Does CAPM hold in practice?

It's an approximation; consider multi‑factor models for richer explanations of returns beyond market risk.

Is beta stable over time?

No; re‑estimate periodically using consistent horizons. Betas can change with business fundamentals or market conditions.

What horizon should I use?

Annualized inputs are typical; keep units consistent across risk‑free rate, market return, and beta estimation period.

What is alpha vs SML?

Alpha is excess realized return above the CAPM expectation at given beta. Positive alpha indicates outperformance relative to SML.

How does changing Rf affect SML?

Shifts intercept and alters expected return at all betas. Higher risk‑free rates raise the entire SML.

Why is market premium important?

It scales expected returns per unit of beta risk. Larger premiums imply higher expected returns for risky assets.

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Security Market Line (SML) Calculator

Estimate expected return using CAPM given beta, risk-free rate, and market return.

How to use Security Market Line (SML) Calculator

Step-by-step guide to using the Security Market Line (SML) Calculator:

  1. Enter your values. Input the required values in the calculator form
  2. Calculate. The calculator will automatically compute and display your results
  3. Review results. Review the calculated results and any additional information provided

Frequently asked questions

How do I use the Security Market Line (SML) Calculator?

Simply enter your values in the input fields and the calculator will automatically compute the results. The Security Market Line (SML) Calculator is designed to be user-friendly and provide instant calculations.

Is the Security Market Line (SML) Calculator free to use?

Yes, the Security Market Line (SML) Calculator is completely free to use. No registration or payment is required.

Can I use this calculator on mobile devices?

Yes, the Security Market Line (SML) Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.

Are the results from Security Market Line (SML) Calculator accurate?

Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.