Market Line

The Market Line can be plotted on the Manager Risk/Return graph. The capital market line is a straight line that can be drawn in any coordinate system where risk is the x-axis and return is the y-axis. The capital market line is the straight line that connects the point for the cash equivalent and the point for the Market Benchmark in this coordinate system. Any point on this line corresponds to a portfolio consisting of part cash equivalent (possibly shorted) and part Market Benchmark. In other words, the capital market line indicates what one could achieve by mixing cash (long or short) into the Market Benchmark.

If a manger lies to the right of this line, it means that the same return could have been achieved with less risk using a blend of cash and Market Benchmark. If a manager is to the left of this line, it means that any blend of cash and Market Benchmark would have had lower returns than the manager, higher risk than the manager, or both.


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