(very short)
The Capital Market Line (CML) is used to determine the optimal portfolio for an investor, while the Security Market Line (SML) is used to determine the expected return for an individual security or portfolio based on its systematic risk, as measured by beta.
(longer)
The Capital Market Line (CML) and Security Market Line (SML) are both used in financial modeling to determine expected returns on investments, but they differ in their focus.
The CML represents the efficient frontier of risky assets, including both stocks and bonds. It plots the risk-return tradeoff for a portfolio that includes a risk-free asset and a market portfolio. The slope of the CML represents the market risk premium, while the intercept represents the risk-free rate. The CML is used to determine the optimal portfolio for an investor based on their risk tolerance.
In contrast, the SML is used to determine the expected return for a given level of systematic risk, as measured by beta. It plots the expected return for a security or portfolio against its beta, and the slope represents the market risk premium. The SML is based on the Capital Asset Pricing Model (CAPM), which suggests that an asset's expected return is equal to the risk-free rate plus its beta multiplied by the market risk premium.
Overall, the main difference between the CML and SML is that the CML focuses on portfolio construction and the risk-return tradeoff of a diversified portfolio, while the SML focuses on the expected return for an individual security or portfolio based on its systematic risk, as measured by beta.