The CML is a line that is used to show the rates of return, which depends on risk-free rates of return and

levels of risk for a specific portfolio. SML, which is also called a Characteristic Line, is a graphical representation of the market's risk and return at a given time. One of the differences between CML and SML is how the risk factors are measured. While standard deviation is the measure of risk for CML, Beta coefficient determines the risk factors of the SML. The CML measures the risk through standard deviation, or through a total risk factor. On the other hand, the SML measures the risk through beta, which helps to find the security's risk contribution for the portfolio. While the Capital Market Line graphs define efficient portfolios, the Security Market Line graphs define both efficient and non-efficient portfolios.While calculating the returns, the expected return of the portfolio for CML is shown along the Y- axis. On the contrary, for SML, the return of the securities is shown along the Y-axis. The standard deviation of the portfolio is shown along the X-axis for CML, whereas, the Beta of security is shown along the X-axis for SML. Where the market portfolio and risk free assets are determined by the CML, all security factors are determined by the SML. Unlike the Capital Market Line, the Security Market Line shows the expected returns of individual assets. The CML determines the risk or return for efficient portfolios, and the SML demonstrates the risk or return for individual stocks. Well, the Capital Market Line is considered to be superior when measuring the risk factors.

Summary: 1. 2. 3. 4. 5. The CML is a line that is used to show the rates of return, which depends on risk-free rates of return and levels of risk for a specific portfolio. SML, which is also called a Characteristic Line, is a graphical representation of the market's risk and return at a given time. While standard deviation is the measure of risk in CML, Beta coefficient determines the risk factors of the SML. While the Capital Market Line graphs define efficient portfolios, the Security Market Line graphs define both efficient and non-efficient portfolios. The Capital Market Line is considered to be superior when measuring the risk factors. Where the market portfolio and risk free assets are determined by the CML, all security factors are determined by the SML.

Mean reversion is a mathematical concept sometimes used for stock investing, but it can be applied to other assets. In general terms, the essence of the concept is the assumption that both a stock's high and low prices are temporary and that a stock's price will tend to move to the average price over [1] time.

Arbitrage pricing theory (APT) is a valuation model. Compared to CAPM, it uses fewer assumptions but is harder to use. The basis of arbitrage pricing theory is the idea that the price of a security is driven by a number of factors. These can be divided into two groups: macro factors, and company specific factors. The name of the theory comes from the fact that this division, together with the no arbitrage assumption can be used to derive the following formula: r = rf + 1f1 + 2f2 + 3f3 + where r is the expected return on the security, rf is the risk free rate, Each f is a separate factor and each is a measure of the relationship between the security price and that factor. This is a recognisably similar formula to CAPM. The difference between CAPM and arbitrage pricing theory is that CAPM has a single non-company factor and a single beta, whereas arbitrage pricing theory separates out non-company factors into as many as proves necessary. Each of these requires a separate beta. The beta of each factor is the sensitivity of the price of the security to that factor. Arbitrage pricing theory does not rely on measuring the performance of the market. Instead, APT directly relates the price of the security to the fundamental factors driving it. The problem with this is that the theory in itself

provides no indication of what these factors are, so they need to be empirically determined. Obvious factors include economic growth and interest rates. For companies in some sectors other factors are obviously relevant as well - such as consumer spending for retailers. The potentially large number of factors means more betas to be calculated. There is also no guarantee that all the relevant factors have been identified. This added complexity is the reason arbitrage pricing theory is far less widely used than CAPM.