ACCA FM · Chapter 12 · Question 8 of 9
What is the difference between business risk and financial risk?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Business risk arises from the variability of operating profits, while financial risk arises from the use of debt finance
Explanation
Business risk is the variability of operating profit (PBIT) caused by the nature of the business, such as demand and cost structure. Financial risk is the additional variability in returns to shareholders caused by having to pay fixed interest on debt. An asset beta reflects business risk only, while an equity beta reflects both.
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