Capital Market Line: How Forex Trading Works

4 min read

The Capital Market Line (CML) is a graphical representation of the relationship between expected risk and expected return for a portfolio. The CML can be used to evaluate Forex investments in terms of their expected risk and return. The line shows the efficient frontier, based on the risk-free rate of return and the expected return (in this case, Forex exchange rate returns) of the market portfolio. The CML will help traders understand the risk-return profile of different Forex investments, and use that knowledge to select the best financial instruments for meeting their investment objectives.