The CAPM provides a justification for passive or index
investing by positing that assets that are not on the
efficient frontier will either rise or lower in price
until they are on the efficient frontier of the market
portfolio. The CAPM Risk Premium on an investment is the measure of
how much the asset's performance differs from the risk
free rate. Negative Risk Premium generally indicates
that the investment is a bad investment, and the money
should be allocated to the risk free asset or to a
different asset with a higher risk premium.
The Capital Market Line relates the excess expected
return on an efficient market portfolio to it's Risk.
The slope of the CML is the Sharpe Ratio for the market
portfolio. The Security Market line is constructed by
calculating the line of Risk Premium over
CAPM.beta
. For the benchmark asset this
will be 1 over the risk premium of the benchmark asset.
The CML also describes the only path allowed by the CAPM
to a portfolio that outperforms the efficient frontier:
it describes the line of reward/risk that a leveraged
portfolio will occupy. So, according to CAPM, no
portfolio constructed of the same assets can lie above
the CML.
Probably the most complete criticism of CAPM in actual
practice (as opposed to structural or theory critiques)
is that it posits a market equilibrium, but is most often
used only in a partial equilibrium setting, for example
by using the S&P 500 as the benchmark asset. A better
method of using and testing the CAPM would be to use a
general equilibrium model that took global assets from
all asset classes into consideration.
Chapter 7 of Ruppert(2004) gives an extensive overview of
CAPM, its assumptions and deficiencies.
CAPM.RiskPremium
is the premium returned to the
investor over the risk free asset
$$\overline{(R_{a}-R_{f})}$$
CAPM.CML
calculates the expected return of the
asset against the benchmark Capital Market Line
CAPM.CML.slope
calculates the slope of the Capital
Market Line for looking at how a particular asset
compares to the CML
CAPM.SML.slope
calculates the slope of the
Security Market Line for looking at how a particular
asset compares to the SML created by the benchmark