what is the security market line 
the security market line sml is a line drawn on a chart that serves as a graphical representation of the capital asset pricing model capm which shows different levels of systematic or market risk of various marketable securities plotted against the expected return of the entire market at any given time 1also known as the characteristic line the sml is a visualization of the capm where the x axis of the chart represents risk in terms of beta and the y axis of the chart represents expected return the market risk premium of a given security is determined by where it is plotted on the chart relative to the sml 1understanding the security market linethe security market line is an investment evaluation tool derived from the capm a model that describes the risk return relationship for securities and is based on the assumption that investors need to be compensated for both the time value of money tvm and the corresponding level of risk associated with any investment referred to as the risk premium interpreting the information from an sml graph helps analysts understand market risks investopedia ellen lindnerthe concept of beta is central to the capm and the sml the beta of a security is a measure of its systematic risk which cannot be eliminated by diversification a beta value of one is considered as the overall market average a beta value that s greater than one represents a risk level greater than the market average and a beta value of less than one represents a risk level that is less than the market average 1the formula for plotting the sml is although the sml can be a valuable tool for evaluating and comparing securities it should not be used in isolation as the expected return of an investment over the risk free rate of return is not the only thing to consider when choosing investments using the security market linethe security market line is commonly used by money managers and investors to evaluate an investment product that they re thinking of including in a portfolio the sml is useful in determining whether the security offers a favorable expected return compared to its level of risk 