Security market line

The security market line (SML) is the CAPM plotted on a graph of expected return versus beta. Assets on the line are fairly priced; those above offer excess return and are undervalued, while those below are overvalued.

ByHoang TruongUpdated July 2, 2026

FrameworkCAPM

See it move

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The security market line plots beta on the horizontal axis against expected return on the vertical axis, passing through the risk-free rate at beta zero and the market return at beta one. An asset plotting above the line earns more than its beta justifies and looks undervalued; investor buying pushes its price up until the return falls back to the line. An asset below the line is overvalued.

Where it fits

TopicRisk, Return & the CAPMCoreSubjectCorporate FinanceCore

The formula

LaTeX

E(R_i) = R_f + \beta_i \times (E(R_m) - R_f)

Variables

$E (R_{i})$: Expected return on asset i
$R_{f}$: Risk-free rate: the y-intercept of the line, where β = 0
$β_{i}$: Beta of asset i: measure of systematic risk relative to the market portfolio
$E (R_{m})$: Expected return on the market portfolio (β = 1)
$E (R_{m}) - R_{f}$: Market risk premium: the slope of the security market line

This is the CAPM equation. Plotted with β on the x-axis and expected return on the y-axis, it is a straight line. Assets above the SML offer excess return and appear undervalued; assets below the SML are overvalued.

Check yourself

PracticeCORE

The CAPM implies that a share with a beta of 0.8 should offer a required return of 9%. After a price decline, the share now offers an expected return of 12%. Where does it plot relative to the security market line (SML), and what does arbitrage logic suggest will happen next?

Select an answer to check your understanding.