Levered beta represents systematic risk of a company in relation to the market, but given levered beta accounts for capital structure, is that not unsystematic risk?
I was always told levered beta does not represent unsystematic risk.
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Think about it this way (and someone please correct me when I’m wrong) - what is beta? Beta is the output of a regression between a specific security (in this case a company’s stock price) and a broad idea of a market portfolio (most people use the S&P as a proxy but in theory it should include the returns on everything). Therefore, both levered and unlevered beta represent systematic risk (it’s the regression output between your returns and the market portfolio) but they differ on whether they include the effects of debt on said systematic risk. The more levered you are the more exposed you are to swings on the market. As such, we choose to unlever beta for companies across an industry to standardize the level of systematic risk to ignore the capital structure effects of debt (mainly because you can choose the level of debt your company has) and then re-lever it at your company’s capital structure. You can still run a DCF with either but the immediate output you get represent different things. So I guess to summarize, both are measures of systematic risk but they either include or exclude the effects of debt.
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