the security Market line now building on what we've learned about the capital asset pricing model or Cap N. We can move on to the security Market line and the SML is just a graphical representation of the cap and model.

Where the x-axis is systematic risk measured by Beta? And the y-axis is the required or expected return for the asset now to security Market online is used by investors in evaluating a security for inclusion potentially in a portfolio in terms of whether that's Security offers a favorable expected return against its level of risk now having said that it's important to understand that both the cap M and the SML are functions that give us an indication on what the return in the market or a security should be given a certain level of risk. However, the actual return may be quite different from this expected return.

Now digging deeper into the security Market line here. You'll see a familiar formula. It's essentially the cap M formula. And since the security Market line is just a graphical depiction of the capm model the SML equals that cap M formula also.

In here's an example in a graph where the purple line is. They security Market line. It shows you the expected return for each level of risk. The y-intercept is the risk free rate and the slope is a market risk premium.

Now when Securities are applauded on this SML chart if they appear above the SML line as we see in the green dots it is considered undervalued because he secures our expected to produce a return that is greater than its risk would indicate as measured by Beta on the other hand. If a security plots below that SML line, it is considered overvalued in price because they expected return does not meet the required return for the level of risk taken and lastly if a security plot on the SML line, you are expected to receive the proper level of return for the level of risk, and therefore the security is properly valued.