Question

Beta is the measure of market risk. Look at the businesses listed below and see if...

Beta is the measure of market risk. Look at the businesses listed below and see if you can identify one that could very likely have a relatively high total risk but a low beta. Explain your reasoning.

a. The manufacturer of diamond-encrusted dog collars.

b. A company that specializes in finding and salvaging old shipwrecks from the Age of Discovery (the 1500s and 1600s).

c. A casino
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Answer #1

Answer is c. casino

The reason is that casino possess the relative high risk but low beta. Casino business is riskier but it is less volatile than the market and has a beta less than 1. Beta is related to the systematic risk of the business. Systematic risk depends on the profitability in realtion to the assets invested. Casinos with high efficiency have a low systematic risk which means if the firm is profitable in relation to the total assets, it has low beta.

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