The weighted average cost of capital.docx - Security market...

Security market line or SML is a graphical representation of the returns expected to be provided
by security given the amount of systematic risk taken in by it. The securities market line is used
by investors to determine whether to include security in their portfolio or not.
The SML formula is: Expected Return = Risk-free rate of return + β (Market Return – Risk-free
rate of return). It is used by investors to evaluate or determine whether a security should be
included or not, potentially in a portfolio, depending on whether that security offers a favorable
expected return against its level of risk.
In basic term, risk measure is something we do in everyday life. For example, when crossing the
road - we look both ways at the traffic, assess the risk of being hit and decide whether or not to
cross. Risk measures are statistical tools and formulae that assess the risk involved in potential
investments. They are a core part of Modern Portfolio Theory (MPT), the standard methodology