Question

Share prices of many “high- tech” firms are quite volatile relative to the stock market index. In an article in The Wall Street Journal (reprinted in The Globe and Mail, May 16, 2001, Greg Ip discussed a reason why. He pointed out that high- tech firms have high fixed costs, consisting mainly of R& D driven by rapid technological progress. They also have low variable costs, since the direct production costs of their products tend to be low. In effect, high- tech firms have high operating leverage.
For example, Yahoo Inc. incurred a drop in revenue of 42% in the first quarter of 2001, but its costs barely dropped. It reported an operating loss of $ 33 million for the quarter, compared to a profit of $ 87 million in the last quarter of 2000.

Required
a. Use high operating leverage to explain high stock price variability.
b. Use the argument that beta is non- stationary ( Section 6.2.3 ) to explain high stock price volatility.
c. Use the behavioural finance concepts of momentum and bubbles to explain high stock price volatility.
d. Are these three sources of volatility mutually exclusive? Explain.



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  • CreatedSeptember 09, 2014
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