Why is beta of asset=unlevered beta?

Didn't get this-

Beta Equity = Beta Asset + (D/E)*(Beta Asset- Beta Debt)

Beta Asset is not dependent on how the assets of a firm are financed and hence it is equivalent to a firm’s unlevered beta. T being the tax rate, the relationship between the levered and unlevered beta can be written as

Beta Levered = Beta Unlevered * (1+{(D/E)(1-T)}) – {Beta Debt * [(D/E)(1-T)]}

 
Best Response

unlevered beta (asset beta) levered betta (equity beta)

1) Now let's look at the similarity: they are both measures of volatility.

2) Now let's look at the difference: levered beta takes into account the company's debt, whereas unlevered beta does not consider the debt held by the firm.

3) What does this imply? The volatility of a company without any leverage is the result of only its assets. Therefore, asset beta measures the risk of the business itself while equity beta measures the risk of a share in the firm. Asset beta is the inherent systematic risk of the company's operations.

4) But you may ask why? Or in more concrete terms why is "business risk" meaning business operations' risk not incorporate debt into the calculation? Well, first you need to distinguish between "business risk" and "financial risk."

Financial risk is a company's capital structure, in other words, how much debt they have, or how leveraged they are. So, a company with debt has a higher risk than a company with no debt because they have to divert some of their cash flows to paying the interest and eventually paying off the principal of the debt.

https://www.wallstreetoasis.com/forums/unlevered-beta

The reason why asset beta is unlevered beta is that the operations within a business do not get riskier with more debt. Well, in general sense it does get riskier, but I think in the context of the term "beta" it doesn't get riskier.

 

Quibusdam mollitia exercitationem suscipit accusantium ipsum alias sit. Minus nostrum ipsum numquam ea repudiandae provident. Cumque incidunt ratione quidem ea possimus consequatur.

Perspiciatis qui accusantium illum occaecati. Perferendis iste blanditiis dolorem quasi possimus amet. Delectus qui voluptatem ea repudiandae.

Quia ratione adipisci molestiae. Tempora quis ut et facilis et harum. Accusantium cumque quas commodi et aliquid ipsa. Nulla dolor cumque voluptatem eos rerum quasi. Deleniti molestiae eos distinctio ut. Optio sunt quia nulla eum qui. Impedit dolore aperiam vel incidunt. Dolor dolore velit non minus harum molestiae voluptates est.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
DrApeman's picture
DrApeman
98.9
9
GameTheory's picture
GameTheory
98.9
10
bolo up's picture
bolo up
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”