Beta

Beta - Unlevered and Levered

Sep 5, 2019
Beta

Beta is a measure of market risk. Unlevered Firm $u$ If a firm has no debt, it’s all equity-financed and thus its equity’s beta $\beta_{E}$ equals its asset’s beta $\beta_{A}$. This beta is also the unlevered beta, $\beta_{\text{unlevered}}$, since it’s unaffected by leverage. The unlevered beta measures the market risk exposure of the firm’s shareholders. Let’s call this firm $u$, Hence, we have: \begin{equation} \beta_{\text{unlevered}}=\beta_E^u=\beta_A^u \end{equation} This equality says that in an unlevered firm, the unlevered beta equals its equity beta and its asset beta. ...