Learn the security market line — Hinglish notes

5.5.6 · Stock-Market › Portfolio Theory

SML exist KYUN karta hai?

YEH kaun-sa problem solve kar raha hai? Investors jaanna chahte hain: "Is stock se mujhe kya return expect karni chahiye, uski risk ke hisaab se?" Lekin saari risk equal nahi hoti. Agar tumhare paas pehle se ek diversified portfolio hai, toh koi naya stock add karna sirf uski us part se matter karta hai jo market ke saath move karta hai — kyunki stock-specific fluctuations bahut saari holdings mein cancel ho jaate hain.

Sirf market risk kyun pay hoti hai: Firm-specific (idiosyncratic) risk tum free mein delete kar sakte ho, sirf diversify karke. Koi tumhe us risk ke liye pay nahi karta jo tumne khud remove na karna choose kiya. Isliye market sirf non-diversifiable (systematic) risk ke liye tumhe compensate karta hai, jo beta se measure hoti hai.

SML ko first principles se KAISE derive karein

Step 1 — Shuru karo jo tum hamesha earn kar sakte ho usse. Risk-free rate $R_{f}$ tumhara baseline hai. Kyun? Tum ek T-bill khareed ke $R_{f}$ zero risk ke saath pa sakte ho, isliye kisi bhi risky asset se $R_{f}$ se kam expected return nahi milni chahiye jab tak ki woh tumhare portfolio risk ko reduce na kare.

Step 2 — Market risk ke ek unit ki price define karo. Poora market portfolio $β_{m} = 1$ rakhta hai aur expected return $R_{m}$ hai. Toh market risk ki ek poori unit lene ka reward (yaani $β = 0$ se $β = 1$ tak jaana) hai: $Market Risk Premium = R_{m} - R_{f}$ Yeh step kyun? Yeh "menu price" hai — beta ki per unit excess return, jo market se directly padhi jaati hai.

Step 3 — Scale karo iske hisaab se ki TUMHARA asset kitni market risk carry karta hai. Beta $β_{i}$ wala asset us risk ki $β_{i}$ units carry karta hai. Toh uska risk premium hai $β_{i} (R_{m} - R_{f})$ .

Step 4 — Baseline wapas add karo. $E (R_{i}) = R_{f} + β_{i} (R_{m} - R_{f})$

Line padhna: fairly priced, sasta, mahenga

Worked examples

Forecast-then-Verify

Common mistakes (steel-manned)

Feynman

Recall 12-saal ke bachche ko samjhao

Socho ek class mein sab ek bade lunch table share karte hain. Kuch bacche loud, unpredictable snacks laate hain — lekin agar bahut saare bacche yahi karein, toh shor average out ho jaata hai aur kisi ko takleef nahi. Yahi "diversifiable" chaos hai: ignore karna free hai. Lekin agar koi snack poori table ko hilaye (jaise jab bell bajti hai toh sab ek saath jump karte hain), woh hilna tum escape nahi kar sakte. SML ek fairness rule hai: tumhe reward sirf poori-table ke hilne (beta) ko bardaasht karne ke liye milta hai, kabhi apne private noise ke liye nahi jo tum avoid kar sakte the. Zyada poori-table hilna = seedha, predictable thoda zyada reward.

Active-recall flashcards

Security Market Line apne x aur y axes par kya plot karta hai?

Beta (systematic risk) x par, expected return y par.

SML/CAPM equation likho.

E (R_{i}) = R_{f} + β_{i} (R_{m} - R_{f})

SML ka intercept kya hai?

Risk-free rate

R_{f}

(

β = 0

par return).

SML ka slope kya hai?

Market risk premium

R_{m} - R_{f}

Beta kaise define hota hai?

β_{i} = Cov (R_{i}, R_{m}) / Var (R_{m})

SML kaun si risk ko reward karta hai?

Sirf systematic (non-diversifiable) risk ko, firm-specific risk ko nahi.

Ek stock SML ke UPAR plot hota hai — iska kya matlab hai?

Woh apni risk se zyada return offer karta hai → underpriced → positive alpha → kharido.

Ek stock SML ke NEECHE plot hota hai — matlab?

Overpriced; apne beta ke liye expected return bahut kam → negative alpha.

Alpha kya hai?

Actual expected return minus SML-fair return:

α = R_{a c t u a l} - E (R)_{S M L}

SML aur CML mein key difference kya hai?

SML beta use karta hai (koi bhi asset); CML total risk σ use karta hai (sirf efficient portfolios).

E(R) compute karo:

R_{f} = 4%

R_{m} = 10%

β = 1.5

4 + 1.5 (6) = 13%

Kisi stock ka expected return

R_{f}

se neeche kyun ho sakta hai?

Agar uska beta negative ho (hedge-jaisa asset), toh premium term negative ho jaata hai.

Connections

Capital Asset Pricing Model (CAPM) — SML hi CAPM hai ek line ke roop mein draw kiya hua.
Beta and Systematic Risk — x-axis ki quantity.
Capital Market Line (CML) — sibling line jo total risk σ use karti hai.
Diversification — kyun idiosyncratic risk unpriced hai.
Alpha and Mispricing — SML se deviations.
Risk-Free Rate — SML ka intercept.
Efficient Frontier — jahaan se market portfolio aata hai.