 Dear students, risk and return on any investment cannot be separated from each other because there is no investment that can be perceived as the risk-free investment in terms of timings and the amount of future cash flows associated with that particular investment. So in general, in real world, we see that an investor's risk behavior is generally reflected in the return expected by that particular investor in the market. A general investor increases his required rate of return when he perceives an increase in the riskiness of a particular investment and this relationship between the return and risk perceived by an investor can be reflected through a line that is known as security market line. So we can see that security market line reflects the combination of risk and return available on investment alternatives for a particular investor. This SML in fact reflects the risk-return combination that is available for all risky assets in the capital market at a given particular time. Investors select those investments that are consistent with their risk preferences and that may be the lower risk investment or that may be the even higher risk level investment. On the screen, we can see a graph that shows an SML. On this graph, on the X axis, we have the riskiness and this is basically the beta that is representative of business risk, financial risk or many other risks or the systematic risk. On the high axis, we have the nominal risk-pre-rate. So this is basically the risk-pre-rate that is available on a risk-pre-investment. We see that as the level of riskiness increases, the level of return increases. So this is the low risk period. Here is the average risk and the higher risk lies here. This means that for higher level of risk, the investor would require higher level of return. The line that relates the riskiness with the risk-free rate, that line is known as the security market line or in short, the line is the SML. There are certain factors that bring changes in this SML. The first is the movement along the SML. Means that certain factors due to which we can see the movement alongside the SML. This means there is no shift in the SML. Neither there is no change in the slope of the line. Only the movement is alongside the line. In fact, the investors place alternative investments alongside the SML line and then they see the risk return profile that best suits to them. The investment will move alongside the SML if any change in any of its fundamental risk sources occur. This means that if any change occurs due to the business risk, financial risk, country risk, economic risk or some other risk that are associated with a particular investment or its company, due to the changes in this risk forces, the investor will increase its required rate of return. So we will see the movement alongside the SML line. You can see on the screen that with the increase in level of riskiness, there is increase in the expected return and the line goes up down alongside the SML. The upward arrow and downward arrow, these two dimensional arrows shows the movement alongside the line due to change in the level of riskiness. The second change that we can see in the SML is the change in its slope. So SML's slope can be gone upward or lower. The SML's slope basically depicts the risk per unit of return required by a particular investor. At any point on the SML, we see that the risk premium may occur both for the individual investment and for the portfolio of investments. For any individual investment, the risk premium is the difference of expected return on a particular investment and the risk free rate of return. And for the portfolio of investments, the risk premium is the difference between the expected return on a particular portfolio and the real nominal risk free rate. This means that this market risk premium is not constant because the slope of the SML changes over time. So if the risk premium on individual investment and on the portfolio of investment changes, then the slope of the investment will be changed. We can see on the investment that the return on a market portfolio increases from RM to RM dash. This means that the slope of SML will also go upward. But we can see that the nominal risk free rate of return remains the same. So there is only change in the slope of the investment. Now we have the SML from original place to the new place and that is the upward position. The third change that we can experience in the SML is the shift in the SML. So SML is shifted from its existing point to another point. In this way we will see the change in the nominal risk free rate of return. This means that SML may experience a parallel shift in fact. In terms of upward and downward due to change in any of the market conditions and the market conditions are the expected real growth in the economy, a change in the market capital market conditions like change in the discount rate or the change in the expected inflation rate. Any of these three changes happen in an economy. We will see a shift in the SML either towards upward or towards the downward. On the screen we can see that a change that happens is upward in as a result of this change our nominal risk free rate of return also increases to a new rate of return. So due to change in the nominal risk of return there is an upward shift in the SML and that upward shift is creating a new SML.