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INTRODUCTION

Corporate finance is a function, which is used to deal with sources of funds and capital structure of various corporations. Managers take action to increase the monetary value of company and enhance interest of shareholders. Corporate financial management is the process of  forming strategies and policies and making various investment decisions that improve the quality of the operations of the company (Aebi, Sabato and Schmid, 2012). The main objective of corporate financial management is to increase the value of stakeholders of the organisation. It is used to set goals and make plans to attain the same.

This project report consists capital market line and security market line, their importance and graphical representation. Importance of minimum variance portfolios, capital assets pricing model are also covered under this report.

TASK 1

1 Comparison of security market line and capital market line

Security market line: It is an element that represent the risk and return of capital asset pricing model. It demonstrates the relation between expected rate of return and risk measured by beta. It is mainly drawn on a chart which is a graphical presentation of CAPM. The x-axis of the chart reflects the risk and y-axis reflects the expected return. When it is used in portfolio management it reflects the opportunity cost of an investment (Baños-Caballero, García-Teruel and Martínez-Solano, 2014). It is an graphical representation of market risk involved in an investment and its return in future which is based on assumption.

Benefits of SML:

  • It is an investment evaluation methods that can reflect risk and return for the securities and it is mainly based on past assumptions.
  • It can provide the forecasted idea to the investors about the risk and return on their securities for the future period.
  • It is very important because it can provide the information of efficient and non efficient portfolios.
  • It helps the investor by facilitating his work while calculating future value of a portfolio.

Here is a graph that can help to understand the concept of Security Market Line easily:

Security Market Line

Source: Security Market Line, 2018