beta and the risk premium of the market portfolio; that is, the risk pre- mium equals [E(rM) - rf]. The expected return-beta relationship can be portrayed graphically as the security mar- ket line (SML) in Figure 9.5. Because the market beta is 1, the slope is the risk premium of the market portfolio. At the point on the horizontal axis where 1 (which is the market portfolios beta) we can read off the vertical axis the expected return on the market portfolio. It is useful to compare the security market line to the capital market line. The CML graphs the risk premiums of efficient portfolios (i.e., portfolios composed of the market and the risk-free asset) as a function of portfolio standard deviation. This is appropriate because standard deviation is a valid measure of risk for efficiently diversified portfolios that are candidates for an investors overall portfolio. The SML, in contrast, graphs individual asset risk premiums as a function of asset risk. The relevant measure of risk for individual assets held as parts of well-diversified portfolios is not the assets standard deviation or variance; it is, instead, the contribution of the asset to the portfolio variance, which we measure by the assets beta. The SML is valid for both efficient portfolios and individual assets. The security market line provides a benchmark for the evaluation of investment perfor- mance. Given the risk of an investment, as measured by its beta, the SML provides the re- quired rate of return necessary to compensate investors for both risk as well as the time value of money. III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           CHAPTER 9 The Capital Asset Pricing Model 273     Figure 9.5 The security market line.   E(r)               E(rM)