Netflix has a beta of 2.25 and an expected return of 18%. If the expected return on the market is 12% and the risk- free rate is 1.5%, is Netflix correctly priced according to CAPM? Yes No, it is overpriced No, it is underpriced There is not enough information to answer this question A B C D

Netflix has a beta of 2.25 and an expected return of 18%. If the expected return on the market is 12% and the risk- free rate is 1.5%, is Netflix correctly priced according to CAPM? Yes No, it is overpriced No, it is underpriced There is not enough information to answer this question A B C D

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 3Q: Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation...

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Netflix has a beta of 2.25 and an expected return of 18%.
If the expected return on the market is 12% and the risk-
free rate is 1.5%, is Netflix correctly priced according to
CAPM?
Yes
No, it is overpriced
No, it is underpriced
There is not enough information to answer this question
A
B
C
D

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