ON THE THEORETICAL RELATIONSHIP BETWEEN BUSINESS RISK AND SYSTEMATIC RISK

This article develops a theoretical relationship between systematic risk and business risk. It is an area that has not been substantially developed in the literature. Rubinstein (1973) and Lev (1974) both developed theoretical models of systematic risk allowing for stochastic demand. A model is deri...

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Bibliographic Details
Published in:Journal of business finance & accounting 1982-06, Vol.9 (2), p.199-205
Main Author: Conine Jr, Thomas E.
Format: Article
Language:English
Subjects:
Business
Mathematical models
Operating leverage
Portfolio management
Risk
Systematic
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Summary:This article develops a theoretical relationship between systematic risk and business risk. It is an area that has not been substantially developed in the literature. Rubinstein (1973) and Lev (1974) both developed theoretical models of systematic risk allowing for stochastic demand. A model is derived that allows for prices, variable costs and demand to be simultaneously stochastic, utilizing the covariance of the product of random variables. The temporal stationarity of unlevered systematic risk is dependent upon the temporal stationarity of the theoretical structure derived. Insight is gained as to a potential source of the empirically observed temporal instability of levered systematic risk.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.1982.tb00986.x