Capital Market Line - CML

The capital market line isn't where members of Congress have to wait for fish sticks at lunchtime. It's a piece of the capital asset pricing model and represents the difference between risk and return for an asset or portfolio. (Portfolios are groups of assets or investments, in case you missed that bit.)

Remember those line graphs you would draw as a kid (for fun, we're sure) where you could graph two lines and find where they intersected? This is kind of like that, but it tries to find where risky investments and risk-free investments meet. This meeting point is the optimal portfolio location. It means some of the investments in the portfolio are risky, and some aren't.

The theory of measuring portfolios was introduced by Harry Markowitz (early 1950s), adding risk-free investments to it was added by James Tobin in the late 1950s and the capital asset pricing model as a whole was born in the 1960s from the brain of William Sharpe. He won a Nobel Prize for it in the 1990s.

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