In this paper a model is presented to explain the structure of systematic risk. The starting point is the expression for the total dollar return to investors who hold the securities from period t - 1 to t assuming no new securities have been issued in the interim:

where Xt is earnings before interest, preferred dividends, and taxes; T is the corporate tax rate; Dd,t is the interest paid on debt in year t; Dp,t is the dividend paid to preferred shareholders in year t; Dc,t is the dividend (total) paid to equity shares-holders in year t; ΔPt · Nt-1 is the aggregate capital gains for the Nt-1 shares of common stock outstanding as of t-1 and ΔGt is the change in the capitalized value of future growth opportunities. The hypothesis is that the risk associated with the left-hand side variables, the market determined systematic risk, is derived from the corporate variables on the right-hand side of the equation. The market determined level of systematic risk is a linear function of the sensitivity of percent changes in revenues of the firm to percent changes in GNF (asset betas), financial leverage, and changes in growth potential.