Companies with high ratios of fixed costs to project values tend to have high betas.

Question

Quizplus · Accepted Answer

Fixed costs are costs that do not vary with changes in the level of production or sales volume. Companies with high ratios of fixed costs to project values have a higher level of operating leverage, meaning small changes in sales or revenues will have a larger impact on profits. This higher level of operating leverage increases the volatility of the company's earnings, resulting in a higher beta.

Companies with High Ratios of Fixed Costs to Project Values