Definition of Security Market Line

A security market line is a graphical comparison of the capital asset pricing model that presents a graph for expected returns and related systematic risk of a security. The security market line also helps investors to assess what security is expected to produce return at a given level of risk.

The equation that plots a security market line is as follow:

E(Ri) = Rf + Beta * (Rm – Rf)

In the above diagram, the security market line of security is drawn with expected returns on y-axes and systematic risk on x-axes. The Rf is the minimum return that any security offers and beta represents the systematic risk associated with the security. The green marks represent the undervalued stock as they are expected to generate a higher rate of return than SML, And the orange marks represent overvalued stocks that are expected to generate lower returns than SML.