Determinants of Beta
Determinants of Beta Beta for any entity is determined by considering the below 3 factors: 1) Type of Business: Beta is a measure of the risk of a firm relative to a market index, the more sensitive business the higher is its beta. Eg. If any sector is very sensitive to economic conditions it will have a higher beta. 2) Degree of Operating Leverage: The degree of operating leverage is a function of the cost structure of a firm, also known as the relationship between fixed cost and total cost. Higher variance in operating income will lead to higher beta for a firm with high operating leverage. 3) Degree of Financial Leverage: An increase in financial leverage will increase the equity beta of a firm. Basically, Equity beta for a company is determined by both riskiness of the business it operates and the amount of financial leverage it has taken on.