CML vs CAL & SML

When the risk free asset is added to the efficient frontier you get the CAL and CML. CML = CAL for the entire market, assuming everyone has the same mean variance expectations ( E(R), variances, correlations). CAL is just the CML for individual investors. CAL and CML are both combine the risk free asset with the optimal portfolio, only with CML that optimal portfolio is the market portfolio (tangency point of CML). Slope of CML = Sharp ratio SML is the graph of the CAPM. Slope = MRP = E(Rm) - Rf Securities plot above SML if they are under-priced, under SML if they are overpriced.. etc.

The whole purpose of showing CAL, CML and SML is to show much extra risk adjusted return you can earn (sharp ratio) per unit of risk. Rf is guaranteed anyway. So dont worry about it when we speak about risk adjusted return. You and I can get different CAL (because you and I might have different expected return and variance expectations). So CAL is a base for CML and CAPM. Plus CML may be different in real world based on what is ur market proxy. But if everybody uses same market proxy and same expected retun and variance for that market proxy, everybody gets the same CML. When you see market risk premium, where does it come from? Which market proxy we used? CAL concept leads to CML, which leads to SML (CAPM). Same concepts but different proxies. Plus mean variance arc is left upward sloping.