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

Beta measures the volatility of a stock or portfolio compared to the overall market. A high beta means that the stock is more volatile than the market, while a low beta means that the stock is less volatile than the market. High cyclical business activity and high operating leverage both contribute to higher beta. High cyclical business activity means that the firm's revenues and earnings are more sensitive to changes in the economy, while high operating leverage means that the firm has high fixed costs relative to variable costs. This combination can result in large swings in earnings and stock prices, which increase beta.

The Beta of a Firm Is More Likely to Be