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Capital Market Line Formula

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The Expected Portfolio Return is the combination of the expected returns, or averages of probability distributions of possible returns, of all the assets in an investment portfolio. Check FAQs

R p = Rf + (\frac{ER m - Rf}{σ m}) \cdot σ p

R_p - Expected Portfolio Return?Rf - Risk Free Return?ER_m - Expected Return on Market Portfolio?σ_m - Market Risk?σ_p - Portfolio Risk?

Capital Market Line Example

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Here is how the Capital Market Line equation looks like with Values.

Here is how the Capital Market Line equation looks like with Units.

Here is how the Capital Market Line equation looks like.

9.6 = 12 + (\frac{9 - 12}{5}) \cdot 4

9.6 = 12 + (\frac{9 - 12}{5}) \cdot 4

9.6 = 12 + (\frac{9 - 12}{5}) \cdot 4

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Capital Market Line Solution

Follow our step by step solution on how to calculate Capital Market Line?

FIRST Step Consider the formula

R p = Rf + (\frac{ER m - Rf}{σ m}) \cdot σ p

Next Step Substitute values of Variables

∴

R p = 12 + (\frac{9 - 12}{5}) \cdot 4

Next Step Prepare to Evaluate

∴

R p = 12 + (\frac{9 - 12}{5}) \cdot 4

LAST Step Evaluate

∴

R p = 9.6

Capital Market Line Formula Elements

Variables

Expected Portfolio Return

The Expected Portfolio Return is the combination of the expected returns, or averages of probability distributions of possible returns, of all the assets in an investment portfolio.

Symbol: R_p

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Expected Portfolio Return

Risk Free Return

Risk Free Return is the theoretical rate of return attributed to an investment with zero risk.

Symbol: Rf

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Risk Free Return

Expected Return on Market Portfolio

Expected Return on Market Portfolio is the weighted average rate of return for all the assets in the portfolio.

Symbol: ER_m

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Expected Return on Market Portfolio

Market Risk

Market Risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets.

Symbol: σ_m

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Market Risk

Portfolio Risk

Portfolio Risk is a chance that the combination of assets or units, within the investments that you own, fail to meet financial objectives.

Symbol: σ_p

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Portfolio Risk

Other formulas in Quantitative Finance category

Go Risk Neutral Probability

π = \frac{((1 + (\frac{R f}{100})) \cdot P0) - S d}{S u - S d}

Go Ibbotson Chen Earnings Model

ERP = ((1 + (I \cdot 0.01)) \cdot (1 + (rEg \cdot 0.01)) \cdot (1 + (Peg \cdot 0.01)) - 1 + (Y \cdot 0.01) - (RF \cdot 0.01)) \cdot 100

How to Evaluate Capital Market Line?

Capital Market Line evaluator uses Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk to evaluate the Expected Portfolio Return, The Capital Market Line is a special case of the CAL, that is, the line that makes up the allocation between a risk-free asset and a risky portfolio for an investor. Expected Portfolio Return is denoted by R_p symbol.

How to evaluate Capital Market Line using this online evaluator? To use this online evaluator for Capital Market Line, enter Risk Free Return (Rf), Expected Return on Market Portfolio (ER_m), Market Risk (σ_m) & Portfolio Risk (σ_p) and hit the calculate button.

FAQs on Capital Market Line

What is the formula to find Capital Market Line?

The formula of Capital Market Line is expressed as Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk. Here is an example- 9 = 12+((9-12)/market_risk)*4.

How to calculate Capital Market Line?

With Risk Free Return (Rf), Expected Return on Market Portfolio (ER_m), Market Risk (σ_m) & Portfolio Risk (σ_p) we can find Capital Market Line using the formula - Expected Portfolio Return = Risk Free Return+((Expected Return on Market Portfolio-Risk Free Return)/Market Risk)*Portfolio Risk.

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Capital Market Line Formula

Capital Market Line Example

Capital Market Line Solution

Capital Market Line Formula Elements

Other formulas in Quantitative Finance category

How to Evaluate Capital Market Line?

FAQs on Capital Market Line

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