Question
Your broker calls you with a hot tip. He suggests you buy shares in Dave's Delicious Donuts, Inc. (DDD) and add them to your porfolio.
Your broker calls you with a hot tip. He suggests you buy shares in Dave's Delicious Donuts, Inc. (DDD) and add them to your porfolio. They are expected to have a return of 11% for their stockholers - 2% higher than the average stock! In response to your quesstions, he tells you that Treasury bonds are yielding 4% and the average returns in the stock market as a whole are running at 9%. DDD has a Beta of 1.8. Use the Security Market line equation to help you explain (in words) why you should or should not buy the stock. Pay particular attention to the role of Beta in explaining your decision.
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