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
E) None of these.

Question

Quizplus · Accepted Answer

Beta measures the sensitivity of a firm's stock returns to market returns. A high beta indicates that the stock is more volatile than the market. A firm with high cyclical business activity and high operating leverage is more sensitive to changes in the economy and has higher fixed costs, which increases its risk and therefore beta.

The Beta of a Firm Is More Likely to Be