If an asset is priced above the SML, and thus undervalued, it should be bought? and If it is priced below the SML, and thus overvalued, it should be sold? Right?
why does it say at 0:34 that sml also includes individual securities or portfolios - so are the 2 the exact same except one as SD on x axis and other has beta ?
thank you for the great lectureSML pass on the Tbill and S&P500 when we draw it on the graph since Tbill's beta is 0 and S&P500's beta is 1? or we have to choose the line passing on many portfolio most on the scattered graph?
It's a straight line so you only need 2 points. Theoretically, all securities should lie on the line. If they aren't on the line they are not priced correctly. If a security is overpriced, investors will sell it and drive the price down. If it's underpriced, investors will buy it and drive the price up. In equilibrium, all securities should fall on the line.
Ronald Moy how about average return so like s&p500 index could be average return? Or among the scattered points do I have to draw line on the many points as much as I can with straight line?
If the risk free rate increased, but the expected return on the market stayed the same, the intercept term would be higher (risk free rate) and the SML would also become less steep because the slope, which is the market risk premium (E(Rm) - Rf) would be smaller.
Why does prices and returns move in opposite directions? I understand that if an asset's expected return is above the SML, it is undervalued. But, investors will buy up this asset and the price will increase and the expected return will then decrease; thus bringing the asset's return to the level of the security market line. Why does the expected return decrease though? After spending some time thinking about it, I came up with the following: Expected Return = Dividend Yield + Capital Gains yield. If the price increases, the dividend yield will decrease because the bottom of the fraction gets larger; thus decreasing the yield. However, the capital gains yield will also increase because you are receiving capital gains because the price went up. Therefore, the capital gains nullifies the the decreased yield. The return then does not actually decrease. So my thinking does not make sense. Can anyone help?
Beta is a slope when you plot the return of a stock against the return of the market. However, you can now plot it as the independent variable in another graph with the expected return of the asset and you get the security market line.
+Ronald Moy Okay. Thanks so much. I have a big project due at midnight. I just plotted my SML and it says I have to plot the Tangency Portfolio point on there too (which I did on the previous graph when I did the CML graph. To determine beta of the portfolio, I took the betas of each stock and multiplied them by their perspective weights (as determined by my Markowitz optimization set up on excel) and then summed up all the weighted betas, but the total is 0.42. Yet, now that I watched your video, I'm thinking the beta of the Tangency portfolio should always be 1? and therefore, now that I am putting it on the SML graph, it should be on the SML line at beta =1 and the same E[r] as when I graphed it on the CML graph. I don't know if my method for determining beta of a portfolio of stocks that I know the betas of, is wrong, or what. Thanks for any more help you can give me : )
You can determine portfolio through other way. On the CML take the beta of a portfolio whose Share ratio is highest, and that is going to be your portfolio beta on SML too.
are we comparing the expected rate of return calculated under capm Vs actual return to determine whether the security is under priced or over priced. some defined it as difference between estimate returns and expected return under capm
If you have the variance for the market and the covariance between the stock and market you can compute the beta. If you know the expected return of the stock and the market and the risk free rate, you can also compute beta.
Sir stocks that are undervalued giving higher return relative to the risk i’m gonna take, so my question is if i m getting higher return while taking a lower level of risk isn’t is good for me? Then why this particular security is considered to be undervalued & why i should not invest in it?
A negative slope would mean people expect a lower expected return as systematic risk increases. Something that is not consistent with our beliefs about risk and return.
Why wouldn't you want to buy an undervalued asset/portfolio? Your return is higher than expected for the given amount of risk, wouldn't this make it more attractive to investors? Any help/explanation would be appreciated - Confused university student
+Kyle Mcneil You're right, you would buy an undervalued security because the return is greater than what you should receive for the risk you are taking. Points over the SML are undervalued.
+Ronald Moy At 8:14 you said "you don't want to buy these", but yes I understand the concept now. Sorry, was just cramming for an exam. Thanks for a clear explanation.
Gem of example and explanation of what is often a complex and unnecessary mystery in finance classes! Bravo!!
Such a excellent video- you explain the security market line so well...Thank you!!
This video is extremely helpful. Excellent explanation!
Thanks for an incredibly well explained video!
This video helps me a lot thank you Ronald!
Excellent explanation of SML! Thank you!
Fantastic explanation by u. Other are creating the hell outof this complex topic. I will recommend only your videos to my cfa pursuing friend's. 😅👍👍☺
Thanks for the precise and concise video.
Thank you so much for such an insightful video.
Excellent video, explaining SML.
Very very very helpful!!! Thank you so much!!!
clear and to the point.big help, thank you
Really really amazing work, thank you
Thank you for this nice video. Make me know this topic quickly and clearly.
You are amazing! Thank you.
Thanks for the simplistic explanation.
really well explained! thank you!
Thank you! Transparent clear!
You are amazing! I loved this tutorial! it was exactly what I wanted to learn. Not many explained the stock value using SML properly!!!
If an asset is priced above the SML, and thus undervalued, it should be bought? and If it is priced below the SML, and thus overvalued, it should be sold? Right?
That is correct.
Fantastic! Thank you!
Fantastic presentation
Thanks alot,much appreciation.
Best explanation ever
thank you so much sir！
Very good explanation ! Could you make an another clip about estimating the beta faktor?
Thanks ! Greetings from Germany
I is a beautiful sharing. I finally got it
I appreciate u.i have learned a lot
thanks for a great guide ..
why does it say at 0:34 that sml also includes individual securities or portfolios - so are the 2 the exact same except one as SD on x axis and other has beta ?
Excellent video
good explanation. thank you
thank you for the great lectureSML pass on the Tbill and S&P500 when we draw it on the graph since Tbill's beta is 0 and S&P500's beta is 1? or we have to choose the line passing on many portfolio most on the scattered graph?
It's a straight line so you only need 2 points. Theoretically, all securities should lie on the line. If they aren't on the line they are not priced correctly. If a security is overpriced, investors will sell it and drive the price down. If it's underpriced, investors will buy it and drive the price up. In equilibrium, all securities should fall on the line.
Ronald Moy how about average return so like s&p500 index could be average return? Or among the scattered points do I have to draw line on the many points as much as I can with straight line?
Hi, at 6:11: Where do I get these 12%of asset A from? Did you assumed them, or can they be calculated in any way out of the former terms?
I just made it up to illustrate an underpriced security, one that has a return that exceeds what the SML says it should have given its risk.
Hi Ronald, I have a question for this. Is the beta a result from regression or you calculate it based on the covariance-variance formula? Thank you.
Technically, it's the same thing. The covariance/variance formula is how you compute the slope coefficient in a regression.
Thanks for your explanation. I was confused by this for a long time. Now, you solved this problem for me. Appreciate your reply. Best.
Nice video! I understood SML!
Fucking glorious, quality work.
2:03 on the SML graph. shouldn't the horizontal axis be labelled beta of i instead of beta of the market. since SML is a measure of a single security?
It's not labelled beta of the market. The beta of the market is 1 and that is one of the points on the graph.
@@RonaldMoy thank you sir
What about the shifts of the SML?
If the risk free rate increased, but the expected return on the market stayed the same, the intercept term would be higher (risk free rate) and the SML would also become less steep because the slope, which is the market risk premium (E(Rm) - Rf) would be smaller.
Why does prices and returns move in opposite directions? I understand that if an asset's expected return is above the SML, it is undervalued. But, investors will buy up this asset and the price will increase and the expected return will then decrease; thus bringing the asset's return to the level of the security market line.
Why does the expected return decrease though? After spending some time thinking about it, I came up with the following: Expected Return = Dividend Yield + Capital Gains yield. If the price increases, the dividend yield will decrease because the bottom of the fraction gets larger; thus decreasing the yield. However, the capital gains yield will also increase because you are receiving capital gains because the price went up. Therefore, the capital gains nullifies the the decreased yield. The return then does not actually decrease. So my thinking does not make sense.
Can anyone help?
If you pay too high a price, your return will be lower and vice versa.
I thought Beta was a slope; is that for the CAPM formula? Or is the CAPM formula the same as the SML formula. Thanks in advance.
Beta is a slope when you plot the return of a stock against the return of the market. However, you can now plot it as the independent variable in another graph with the expected return of the asset and you get the security market line.
+Ronald Moy Okay. Thanks so much. I have a big project due at midnight. I just plotted my SML and it says I have to plot the Tangency Portfolio point on there too (which I did on the previous graph when I did the CML graph. To determine beta of the portfolio, I took the betas of each stock and multiplied them by their perspective weights (as determined by my Markowitz optimization set up on excel) and then summed up all the weighted betas, but the total is 0.42. Yet, now that I watched your video, I'm thinking the beta of the Tangency portfolio should always be 1? and therefore, now that I am putting it on the SML graph, it should be on the SML line at beta =1 and the same E[r] as when I graphed it on the CML graph. I don't know if my method for determining beta of a portfolio of stocks that I know the betas of, is wrong, or what. Thanks for any more help you can give me : )
You can determine portfolio through other way. On the CML take the beta of a portfolio whose Share ratio is highest, and that is going to be your portfolio beta on SML too.
RAJAN TIWARI Thank you Rajan!
are we comparing the expected rate of return calculated under capm Vs actual return to determine whether the security is under priced or over priced. some defined it as difference between estimate returns and expected return under capm
It could be either. The SML is just giving you a benchmark for comparison. Either for what you believe the return will be or what it actually was.
Thankx . wat z d difference between expected and estimated return in this context
great video
very helpful
thank you
thank you!
Tesla: Hold my beer
If the beta is missing and the only given are E(Ri) & Var(Ri) how will get it.
If you have the variance for the market and the covariance between the stock and market you can compute the beta. If you know the expected return of the stock and the market and the risk free rate, you can also compute beta.
Sir stocks that are undervalued giving higher return relative to the risk i’m gonna take, so my question is if i m getting higher return while taking a lower level of risk isn’t is good for me? Then why this particular security is considered to be undervalued & why i should not invest in it?
Thank you sir
What's means that the slope of SML is negative?
A negative slope would mean people expect a lower expected return as systematic risk increases. Something that is not consistent with our beliefs about risk and return.
thanks a lot
Why wouldn't you want to buy an undervalued asset/portfolio? Your return is higher than expected for the given amount of risk, wouldn't this make it more attractive to investors? Any help/explanation would be appreciated - Confused university student
+Kyle Mcneil You're right, you would buy an undervalued security because the return is greater than what you should receive for the risk you are taking. Points over the SML are undervalued.
+Ronald Moy Thank you for the video, and the correction in here at 8:14 you said shouldn't buy undervalued asset.
+AbdullahRK I listened again and I think I said you should buy it, but thanks for watching and commenting.
+Ronald Moy At 8:14 you said "you don't want to buy these", but yes I understand the concept now. Sorry, was just cramming for an exam. Thanks for a clear explanation.
He says "You'd want to buy these" - "you would want to buy these"
No clarity voice and under ursu tag is covered the graph