ShmoopTube

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Finance allah shmoop what is the security market line A

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Sml Okay let's sort of the basic formula for small

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which is just a beta of a given stock divided

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by the beta of the overall market If you haven't

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seen our martin scorsese directed opus on beta well then

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you should and click on the ads The guy doesn't

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work for cheap you know Yes ml is just a

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graph depicting the risk or volatility adjusted investment returns inside

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of the capital asset pricing model structure or cap in

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overly simply investment opportunities Living up here above the sml

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are probably at least according to this line undervalued And

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securities living below this line are overvalued The line itself

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is sort of ah fairness or at least where everything

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is fairly priced relative to its risk or beta and

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its reward or you know reward the assessment of risk

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Here is the hard part that's risk or beta and

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the quick and g rated dirty on beta is that

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a stock with a beta of one moves in about

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the same direction and amount is the overall market in

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which it lives Think like a tech stock like oracle

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inside of the market of say nasdaq On any given

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day the market might be up one percent If so

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then if oracles displaying a beta of one well then

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it to will be up about one percent and vice

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a versa We'll stock with a beta of two will

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move twice a cz muchas the market aiyana down one

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point five percent day for the market While that stock

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should be down something like three percent notionally bait is

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another word for risk and higher beta stocks imply that

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they're mohr risky But that's a really narrow view because

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over time the market itself goes up There's a long

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term view in a short term view right So yeah

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let's look at this beautiful century issue of stock prices

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of the s and p five hundred Yeah it's up

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not the movie So when someone claims that the stock

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is riskier because it has higher beta well that may

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be true in the day to day trading short run

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But in the long run of riel investors who buy

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and hold stocks a long period of time higher beta

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stocks moving mohr than the market as a basket do

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better than the market But why do we point this

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out Because this model really doesn't work At least not

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for real investors Actually trying teo what's called Oh yeah

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Invest real time Yeah the models A reflection of what

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happened in the past Sort of like driving while looking

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in the rear view mirror You see miles and miles

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of road behind you looking nice and straight as you

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You know head out on the highway looking for investing 00:02:28.04 --> [endTime] Adventure and all is good until it's not

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