FIN200 Assignment, Trimester 2 2018 Explain and graphically depict how Security Market Line (SML) is different from Capital Market Line (CML). Identify and discuss the importance of minimum variance...

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Running Header: Portfolio
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Portfolio
Portfolio Strategy
Table of Contents
Introduction     3
How Security Market Line (SML) differs with Capital market Line (CML)     4
Security Market Line    4
Capital Market Line    5
Difference between Security market line (SML) and Capital Market Line (CML)     6
Minimum Variance Portfolio     7
Capital asset pricing model     8
Conclusion     9
References     10
    
    

Introduction:
The Investors invests its money by sacrificing its present in the hope that it will get benefit of present sacrifice in the future. The main aim of every investor is to earn the expected rate of return on the money invested by it. He can invest in single stock or in the portfolio of different securities. The main question which comes is that which are the securities that will give good amount of return and how to decide them? The investments were made by the people before 1950’s but at that time there were no major portfolio theories that existed for the investors but after that various theories and efficient market hypothesis have been propounded by various researchers and authors to help the investors in knowing what is the relationship between the risk and reward? How Capital market behaves and what is its pattern? How the prices are established in the market?
There are two main things which everyone sees before making any investment as the investment is based upon these questions which are: What is the Risk present in the investment? What is reward from the investment? There are various strategies available which gives insights to the investors about what are the factors to be considered before making investment in any of the security
Financial Investment is commitment of the funds for the return in the future thus investment is the activity where funds are committed in physical or financial form with an expectation of earning in future the required return out of it. From the portfolio management point of view the investments are the financial investments. Thus the financial investments are the commitments of the funds in order to earn the income in form of the dividend, capital gains or interest etc. and hence the purchase of insurance policies, shares and debentures etc are the financial investments for the investors.
These investments are made in the diversified securities so that the variability of returns is reduced. The different securities have different features. Out of the diversified securities available, portfolio is created by the investors to hedge its risk so that the risk is minimum and the return could be maximum at that level of risk.
How Security Market Line (SML) differs with Capital market Line (CML) ?
Security Market Line
The Security market line or the characteristic line is the presentation of the Capital Asset pricing model graphically. It is the theoretical line which has all the capital investments. The figure 2 is given below which presents the SML. The line starting from RF point to the point P is the SML. On the horizontal axis the risk (beta) which is an independent variable is plotted while on the vertical axis which is dependent variable, expected return is presented. SML shows return of security individually as the function of beta. At the Security market line there are different points. Securities will be undervalued if their expected return is plotted above the security market line because the return given by them is greater then what is expected out of them by the investors. On the other side the securities will be overvalued if their expected return is plotted below the security market line because the return given by them is less then what is expected out of them by the investors at the given level of risk. There will be this continuous price adjustment until the undervalued / overvalued securities come at the Security market line.
                                        P (SML)        
                                    F
                                G    
E (Rm)     
(
Expected return
)                         H
        
RF         
                            
                            Risk (Beta)
                    Fig. 2 Security Market Line (SML)
Capital Market Line (CML)
The tangent line which is drawn from point of risk free asset (RF) to feasible...