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Why do different firms in same industry have very different betas?

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Michael Koren eNotes educator | Certified Educator

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The beta of a stock represents the volatility or market risk of investing in that stock. A stock with a beta greater than one is more volatile than the market in which it is listed. If its beta is less than one, then it is less volatile than the market in which it is listed. There are reasons why different firms in the same industry may have different betas.

One factor is how far back one goes in calculating the beta. A calculation going back three years will likely be different than a calculation going back five years. If different firms in the same industry use a different number of years to calculate the beta, the beta will likely be different.

Another factor that is involved would be the capital structure of each firm. Firms that have different capital structures will have different betas. For example, a company with less debt financing will have a lower beta than a company with higher debt financing.

The risk a company faces also impacts its beta. Companies in the same industry may...

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