Although they operate in different industries,two firms have the same expected earnings per share and the same standard deviation of expected EPS.Thus,the two firms must have the same business risk.

Business Risk

The risk inherent in the operations of the firm, prior to the financing decision. Thus, business risk is the uncertainty inherent in a total risk sense, future operating income, or earnings before interest and taxes. Business risk is caused by many factors. Two of the most important are sales variability and operating leverage.

Standard Deviation

A statistical measure of the dispersion or variability of a set of data points, often used in finance to gauge investment risk.

Expected Earnings

The forecasted income of a company, often estimated by analysts based on historical data and future projections, indicating potential future profitability.