What is the primary disadvantage of using the Security Market Line (SML) method?

The primary disadvantage of using the Security Market Line (SML) method lies in the necessity of estimating multiple parameters. The SML is a graphical representation of the Capital Asset Pricing Model (CAPM), which plots the expected return of a security as a function of its systematic risk, measured by beta. To properly utilize the SML, one must estimate various components, including the risk-free rate, the expected market return, and the stock's beta. Each of these estimates carries its own degree of uncertainty and can significantly affect the final analysis, which may lead to imprecise conclusions about the risk-return relationship of an investment.

By requiring multiple inputs, the SML method can become complex and challenging to execute accurately, particularly in volatile or rapidly changing market conditions. This complexity can diminish the effectiveness of the SML as a tool for financial decision-making, making it a significant drawback in its application.