A firm's beta is a measurement of the investment's risk. A beta over 1.0 means that historically, the price of the stock has been more volatile than the price of stocks in the market as a whole, as measured by an index of market activity such as the S&P 500. Operating leverage is a reflection of the amount of debt a company has, and debt creates risk. The fixed costs of debt (interest and repayment of principal) must be paid, and if revenues drop, that will lead to a drop in profits. A drop in profits leads to the risk of default on the debt. Therefore, the level of debt a company has impacts its beta.
A firm's beta is a measurement of the investment's risk. A beta over 1.0 means that historically, the price of the stock has been more volatile than the price of stocks in the market as a whole, as measured by an index of market activity such as the S&P 500. The dividend payout ratio measures the percentage of earnings paid to stockholders as dividends in the past. A firm's dividend payout ratio would not have much impact on its beta.
A firm's beta is a measurement of the investment's risk. A beta over 1.0 means that historically, the price of the stock has been more volatile than the price of stocks in the market as a whole, as measured by an index of market activity such as the S&P 500. The amount of debt a company has as a proportion of its total capital is an indication of the risk incurred by a company, because debt must be repaid, whereas equity does not have to be repaid. Higher debt as a proportion of total capital is an indication of greater risk in the investment, because if revenues decline, the debt may not be able to be repaid. And lower debt is an indication of lower risk. The risk will be reflected in the firm's beta value.
Beta measures the risk of a particular stock as it compares to the market. A beta over 1.0 means that historically, the price of the stock has been more volatile than the price of stocks in the market as a whole, as measured by an index of market activity such as the S&P 500. The characteristics of an industry can indicate risk. If the industry is inherently risky, even the most solid company will have a risk level higher than the market as a whole.
|
