Question

According to your personal analysis, the expected return of NFLX should be 8.9%. However, this is not necessarily what the CAPM is saying. The expected return on the market is 11.5%, the risk-free rate is 1.4%, and the beta for NFLX is 1.14.

You want to exploit the mispricing using an arbitrage portfolio and the recipe from the book. Give the weight in the risk-free asset in percentage.

{Give your answer as a percentage with 2 decimals, e.g., if the answer is 0.345224 (or 34.5224%) , enter 34.52 as your answer.}

Answer 1

	CAPM Expected Return =	Risk Free Rate + Beta ( E(market return) - Risk Free rate)
	Using CAPM	E(NFLX)	= 1.4 + 1.14 * ( 11.5 - 1.4)
	Using CAPM	E(NFLX) =	12.91%
	Personal Analysis	(NFLX) =	8.90%
	As per APT factors needs to be considered for finding the mispricing
	So, the factor considered is risk free asset (F1)
	So actual return will be defined as below formula
		Actual return =    E( Rp) + Weight of the factor * factor (F1)
	So	Actual return of NFLX =   E (NFLX) + weight of Risk Free Asset * Risk free asset
			8.9	=   12.91   + W *   1.4
			W	= (8.9 - 12.9) / 1.4
			W	= -2.85%