 In this section, I'll explain another important concept which is derived from the concept of capital asset pricing model CAPM and that is the security market line. So when you draw the equation which we have just discussed that explained the equilibrium level of the expected return on a certain security, you can get the value of you can get the security market line. So firstly, we need to understand what is meant by the security market line. So security market line basically is an investment evaluation tool which is derived from the concept of CAPM capital asset pricing model or capital asset pricing model. We have just discussed this in detail that this is a risk-return relationship for a specific security when we take a security or an overall market index as a benchmark from the market. We have decided to go for it if we have decided to go for it. So in this, we account for the expected return, we account for the excess market return, we account for excess return on that particular security and when we plot the equation, the line which you will get is called the security market line. Now, if we look at the factors on which the security market line depends, the first one is the time value of money. If I am separating from my money for a certain time, I want to invest and I am not spending my money. So the utility or satisfaction I have to derive from spending right now, I am postponing it. Suppose if I am investing my money for one year or two years, I am separating my money, I am separating myself from the money which I have, if I am investing for one year, I am going away from it. I am not spending it immediately. The satisfaction which I will get from spending right now, to compensate that satisfaction, I need some return. And that return will be equated to the time value of money. We call that particular return time value money, and that is basically the concept of time value of money. We have to count the time value of money when we are discussing the security market line. We are trying to understand it. And the second important thing is the risk premium. You are taking risks again. First, you are spending money. You want to take advantage of that which we call time value money. And second, you are spending money and taking risks. So the risk premium. So these are the two things we account for to define the security market line. Now, if we look at this particular equation, this is the measure of risk. And this is the excess market return. And if we take different values of this particular thing, then when we plot the data from the market, that you took the information of excess market return, that you know the risk-free return, that you are expecting, that you will get expected return from an investment in a certain security. You will be able to estimate those values. Now, if you plot it, you will get the security market line. So this line explains the equilibrium in the capital allocation, capital asset pricing model. And if we plot it, then you get the security market line defined. Now, I'm going to show you the graphical demonstration. So this is the graph of the security market line. You took different values, like I just told you, you need a total of three values. You need data to understand the overall movement of the market. As a benchmark, you will take any standard or index for that. Like we will do an analysis in Pakistan right now. If we will use the capital asset pricing model, then we can take KSE 100 or index values. You took that, that would give you the value for RM. And similarly, we take the value of T-bill return, what will you get on that? 60 days, 30 days. The state bank quotes its data on a daily basis. You can open the website and see. So from there, you will get the value of RF. You have to calculate market returns, you have to calculate risk-free returns. We will show you the difference between the two. You will get an excess market return. You can take an excess market return, you can take a certain security. You can subtract the return from the return. You will get an excess return from that particular security. With the help of these values, you will estimate the line. You will come up with a security market line. I have just drawn it here. The slope of it, we have drawn it like this, with a certain data. The intercept is zero. You saw it here in the equation. You can see that in this equation, we do not have the intercept term. The slope value is defined via the excess market return. So it means that if you do not have the intercept term here, it means that our intercept value is zero. You can see that our SML is passing from zero. So this is our SML. Risk-free, risky asset will be more. Your beta, i.e. the slope value will be more. In that case, it will be something like this. It will pass from the origin. But the big slope means that it is more steep. The slope means that it is a more risky asset. So it could be something like this. It could be something like this. I am calling this A. I am calling this B. A is telling us that any security market line, suppose for A, but we can say that if we look at the slopes, they are different. B has a greater slope. A has a lesser slope, which means that B represents the security and the security market line is more risky. It means that its beta is higher. It means that its slope is steep as compared to this one. So the security market line is derived from the formula, the equilibrium, which we defined to represent the equilibrium to explain the capital asset pricing model to express it in terms of equation. Now, if any security is not on SML, what does it mean? Suppose we are talking about this J point, so if we take any security values, the risk, the risk premium, the beta values, and we have the value of J on this point, that is not optimal. This particular level of risk which J represents, the risk premium you should ask for is higher corresponding to point M, but the risk premium you are getting is at a certain level of risk, that is lower. That is not an optimal point. So if any combination, any point is lower than your security market line, then you will get that inefficient point. That is offering too low expected return. Now, similarly, this particular thing will be against the principle on which the CAPM is based. We will say there are rational investors who explain CAPM to them and they have a lot of information of the market. They decide on their basis and they always go for the efficient combinations. If they go for J, then that would be the corresponding expected return, that is too low, so they would not go for J. They will only go for the combinations that fall on the security market line, which we have discussed right away.