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> The unlevered beta shows you the risk of a firm's equity compared to the market.
Yes, this is technically correct. Know that it is just the systematic risk of the equity portion of a firm, and not all the risk there is.
> And also wanna make sure that we do use levered beta for CAPM right?
Yup.
Thx straightnochaser!
Pls forgive my cynicism but, would it be better for the statement if I say “the unlevered beta shows the risk of investing in the firm’s assets and also the systematic risk of the firm’s equity, after removing the financial effect of leverage, in comparison with the market”?
Less is more.
I reckon. Thx.
Unlevered beta has the capital structure of a firm taken out of the equation (when you de-lever it) essentially giving you a beta without the effect of debt, which is why it is the risk of the equity
Thx for the reply.
This makes sense. But how would you address levered beta if unlevered beta shows the risk of equity?
You can't invest in a company's equity/common stock without investing in the company as a whole/without investing in the company's capital structure. The CAPM formula uses levered beta because equity holders also assume the risk of the current debt the company has. In a liquidation, common equity holders are at the bottom of the cap table since creditors and pref stock holders are paid first. Since common equity holders are paid last, the amount of debt a company takes on matters since they are materially affected by insolvency. Levered beta is defined as a company's stock price covariance or "sensitivity" to market movements ( in short defined as systematic/systemic risk).
Thx Trippy Taco, and congrats on your breaking into the Street!
So my understanding is that unlevered beta would show the risk of the firm's equity after removing effects of debt, and levered beta would reflect sensitivity of stock price (essentially illustrates the fact that an investor invests in the firm's capital structure instead of standalone equity) to the market/systematic risk. Is that correct?
Thx again.
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