Stock line

Security Market Line in the diagram.

{\ displaystyle \ mu - \ beta}

The security market line , securities market line , or securities identification Straight (short WPL, english security market line , SML) is a key result of the capital asset pricing model (a development of portfolio theory ). It describes the relationship between the expected return and the risk of individual securities (under the assumption of a perfect capital market ).

A similar concept is the capital market line . While this shows the expected return of risky portfolios, the security line describes the expected return of individual securities in the model-theoretical capital market equilibrium.

Mathematical representation

The securities line shows expected returns depending on the specific beta factor .

In the financial market equilibrium, the current price of a security adapts in such a way that the expected return exceeds the risk-free interest rate by a risk premium that increases proportionally to the security beta factor:

{\ displaystyle \ operatorname {E} [R_ {i}] = r_ {f} + \ beta _ {i} (\ operatorname {E} [R_ {M}] - r_ {f})}

.

The WPL is therefore a linear function of the individual beta factor . The beta factor reflects the systematic risk . ${\ displaystyle \ beta _ {i}}$

The illustration on the right shows that the market portfolio has a beta of 1, whereas the risk-free investment has a beta of zero. An investment that is above the WPL would suggest a higher return in relation to its beta. This investment would outperform the market or be undervalued. This undervaluation leads to investors increasingly buying the system, thereby increasing its price and thus reducing future returns until the equilibrium value is reached. The same applies to overvalued investments below the security line.

Individual evidence

^ Hering, Thomas, Heinz Eckart Klingelhöfer, and Wolfgang Koch, eds. Enterprise value and accounting: Festschrift for Univ.-Prof. Dr. Manfred Jürgen Matschke on his 65th birthday. Springer-Verlag, 2008. p. 63.
↑ Trautmann, Siegfried. Investments: assessment, selection and risk management. Springer-Verlag, 2007. p. 178.

[1] Hering, Thomas, Heinz Eckart Klingelhöfer, and Wolfgang Koch, eds. Enterprise value and accounting: Festschrift for Univ.-Prof. Dr. Manfred Jürgen Matschke on his 65th birthday. Springer-Verlag, 2008. p. 63.

[2] Trautmann, Siegfried. Investments: assessment, selection and risk management. Springer-Verlag, 2007. p. 178.