Which one of the following statements best explains the fact that cyclical firms tend to have high betas?
A) Their earnings are particularly sensitive to the state of the economy.
B) Their stocks are overpriced.
C) Their earnings are less diversifiable.
D) Their profit margins are small.

Question

Quizplus · Accepted Answer

Cyclical firms are those whose earnings are highly dependent on the state of the economy, which means they are more sensitive to fluctuations in economic conditions. As a result, the performance of these firms is more closely tied to the overall health of the economy, making their betas higher.

Which One of the Following Statements Best Explains the Fact