The Security Market Line (SML) is the graphical representation of the Capital Asset Pricing Model (CAPM), plotting the expected return of an individual security or portfolio against its systematic risk as measured by beta. Unlike the CML, which applies to fully diversified portfolios and uses total risk (standard deviation), the SML applies to individual securities and uses only systematic (market) risk since unsystematic risk can be diversified away. Securities plotted above the SML are considered undervalued (offering excess return for their beta), while those below the SML are overvalued. For equity analysts and investors on Ventura Securities, the SML is a fundamental tool for evaluating whether a stock's expected return justifies the market risk it carries, informing buy/sell decisions within a disciplined valuation framework.
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