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 the above.

Question

Quizplus · Accepted Answer

A high cyclical business activity indicates that the firm's revenues are highly influenced by economic fluctuations, making their cash flows more volatile. High operating leverage means the firm has fixed costs that cannot be adjusted easily, resulting in larger changes in earnings for a given change in revenue. These two factors increase the firm's systematic risk, which is the risk that cannot be diversified away and is reflected in the beta coefficient.

The Beta of a Firm Is More Likely to Be