The Capital Market Line

This video discusses the Capital Market Line.

When the volatility and expected return of different portfolios weights is graphed, the line drawn from the risk-free rate such that it is tangent to the efficient frontier is called the Capital Market Line.

Along the Capital Market Line lies a series of efficient portfolios that are combinations of the risky securities with the risk-free investment.

If the assumptions of the Capital Asset Pricing Model hold, then all investors would choose the portfolio on the Capital Market Line that is tangent to the efficient frontier; this is called the tangent portfolio. The tangent portfolio is the market portfolio and it is the portfolio with the highest Sharpe Ratio. This means it provides the highest reward (expected return) per unit of risk (volatility).—
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