Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have:
A) low betas.
B) high betas.
C) zero betas.
D) negative betas.
E) None of these.

Question

Quizplus · Accepted Answer

Firms with strongly cyclical revenues are more likely to have high betas because their earnings and cash flows are more sensitive to changes in the overall economy. High operating leverage further amplifies this sensitivity, as small changes in revenue can have a significant impact on their profitability. This makes them more volatile compared to the market as a whole, resulting in a high beta.

Firms Whose Revenues Are Strongly Cyclical and Whose Operating Leverage