<p>The Security Market Line (SML) is a graphical representation in the Capital Asset Pricing Model (CAPM) that illustrates the relationship between the expected return and systematic risk of an investment. It's a fundamental concept in modern portfolio theory and capital markets.</p>

<h2>How It Works</h2>
<p>The SML is a straight line on a graph, with expected return on the y-axis and beta (a measure of systematic risk) on the x-axis. The line starts at the y-intercept, which is the risk-free rate (Rf), and has a slope equal to the market risk premium (E[Rm] - Rf). The formula for the SML is:</p>
<p><strong>E[R] = Rf + β(E[Rm] - Rf)</strong></p>
<p>Where:</p>
<ul>
  <li>E[R] is the expected return on the investment</li>
  <li>Rf is the risk-free rate</li>
  <li>β is the beta of the investment</li>
  <li>E[Rm] is the expected return on the market portfolio</li>
</ul>

<h2>Why It Matters</h2>
<p>The SML is crucial for investors as it helps to determine the expected return for any level of systematic risk. For instance, an investor considering two stocks, A and B, with betas of 1.2 and 0.8 respectively, and a market risk premium of 0.05, can use the SML to find their expected returns:</p>
<ul>
  <li>Stock A: E[R] = Rf + 1.2(0.05) = Rf + 0.06</li>
  <li>Stock B: E[R] = Rf + 0.8(0.05) = Rf + 0.04</li>
</ul>
<p>This shows that Stock A, with higher risk, is expected to return more than Stock B.</p>