The greater the systematic risk (Beta) -> the greater the expected return to a risky asset. Graphical representation of the notion embodied in the CAPM, that expected asset returns are linearly related to systematic risk.

Remember, the CML connects the rf asset with the risky (market) portfolioвЂ¦hence all the points on this line segment are combinations of the rf and the market portfolio. If you can invest in risky assets and the rf asset : the efficient frontier is the CML. All points on the efficinet frontier are combinations of risky assets that generate the highest return for a given level of risk. If you can only invest in risky assets : the efficient frontier is the upper portion of the minium variance frontier. There is another way to understand the CML : It is the efficient frontier in a universe where you can invest in risky stocks and the rf asset. Whether you invest 10 % in rf and 90 % in market portfolio depends again on indivifual risk preferences BUT the market portfolio is the same for EVERYONE.

While the CAL is a combination of the rf and a risky portfolio which varies across individuals, the CML is a combination of the rf and the tangency portfolio (market portfolio).ДЄll the points on the CAL are combinations of the rf and a risky portfolio which varies from person to person according to his/her risk preferences.ДЄll the points on the CML are combinations of the rf and market portfolio which is the same for each person. If you impose a set of conditions on the CAL such as homogeneous expectations with respect to EВ® and risk of asets across ALL MARKET PARTICIPANTS you will get the CML. Your risky portfolio will be different from mine. I may be more risk averse than you and invest 20 % in rf and 80 % in a risky portfolio. Your CAL will be different from mine (has a different slope) because we have different risk preferences and objectives. Whether your overall portfolio is 10% invested in rf and 90 % in a risky portfolio or the other way around depends on your preferences and risk tolerance / objectives. All the points on the Capital Allocation Line are combinations of

Cal vs cml vs sml