The beta of a firm is more likely to be high under what two conditions?
A) High cyclical business activity and low operating leverage.
B) High cyclical business activity and high operating leverage.
C) Low cyclical business activity and low financial leverage.
D) Low cyclical business activity and low operating leverage.

Question

Quizplus · Accepted Answer

High cyclical business activity means the firm's earnings are highly sensitive to economic cycles, and high operating leverage means a larger portion of costs are fixed, making earnings more volatile with sales changes. Both conditions increase the firm's beta, indicating higher risk and sensitivity to market movements.

The Beta of a Firm Is More Likely to Be