A Simple Derivation of the Capital Asset Pricing Model from the Capital Market Line

Abstract

This paper demonstrates a simple way of deriving both the Capital Asset Pricing Model (CAPM) and a capital asset’s beta value from the Capital Market Line (CML). The CML model is extended to include a series of isocorrelation curves along which the returns of any portfolio can be plotted according to its total risk and the degree to which its return correlates to that of the market. This approach is simpler than methods currently available in the relevant literature and may be useful for teaching purposes.

Keywords: capital market line, CML, capital asset pricing model, CAPM, security market line, SML, isocorrelation curves, isobeta curves

JEL Classification: G11