Jack has interest in buying Riskee, Inc. stock. Having taken Finance 2660, he remembered to use the capital asset pricing model (CAPM) as a way of determining the asset’s risk-return relationship. He asked his stock broker for Riskee’s beta coefficient, and after some delay, he was given a number of 3.0. He then referred to some financial print media to determine return values for the DJIA (market) and the 30-year Treasury Bond as 10.0% and 2.0%, respectively. Lastly, after interviewing the CFO at Riskee, he learned that based on Riskee’s expected increase in market share and improved operation efficiency, Riskee is expected to provide a return to its shareholders of 27%, per year. Although Jack was a good student at CSU and can probably solve his problem independently, he has sought your assistance in making this investment decision. Should Jack purchase shares of Riskee stock? Explain the reason for your decision with sound financial theory.
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