What are the two different types of risk in the context of leverage?

In the context of leverage, the risk as variation in financial performance is measured by variation in ROE and EPS. This notion is separable into two pieces, business risk and financial risk. Business risk is variation in a firm's operating performance as measured by EBIT. It arises from variations in revenues, costs, and expenses. Hence, business risk is defined as variation in EBIT itself. Financial risk is the additional variation in ROE and EPS brought about by financial leverage. In an unleveraged firm (one with no debt), the variation in ROE and EPS is identical to the variation in EBIT. In a leveraged firm, the variation in ROE and EPS is always greater than the variation in EBIT. Further, the more leverage the firm uses, the larger is the incremental variation.