Capital market line

The capital market line plots the expected return of efficient portfolios combining the risk-free asset and the market portfolio against total risk (standard deviation).

ByHoang TruongUpdated July 5, 2026

See it move

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With a 3% risk-free rate and a market portfolio returning 9% at 15% risk, an investor holding 60% market and 40% risk-free earns 0.40×3% + 0.60×9% = 6.6%, at 0.60×15% = 9% risk — exactly what the capital market line's formula gives for that risk level.

Where it fits

TopicRisk, Return & the CAPMAdvancedSubjectCorporate FinanceAdvanced

The formula

LaTeX

E(R_p) = R_f + \frac{E(R_m)-R_f}{\sigma_m}\sigma_p

Variables

$E (R_{p})$: Expected return of the portfolio on the CML (decimal)
$R_{f}$: Risk-free rate (decimal)
$E (R_{m})$: Expected return of the market portfolio (decimal)
$σ_{m}$: Standard deviation of the market portfolio's returns (decimal)
$σ_{p}$: Standard deviation of the portfolio's returns (decimal)

Gives the expected return of any efficient portfolio on the capital market line, given its total risk (standard deviation).