I came across some content on Levered/Unlevered Beta on Investopedia and they had this to say:
"Determining a stock’s levered beta helps the investor to decide and determine the correct course of action to be taken in order to improve profitability. **When the security’s performance is in line with the market, the investor should invest when the market is performing well. When the security’s performance is against the market, it is better for the investor to invest when the market performance is poor."**
Shouldn't this be the opposite? Why would I invest in a market-correlated asset when the market is at its high? Wouldn't I want to invest in a beta=0 security instead to hedge against the impending downturn?
In the very same article we see these two contradicting statements:
1) "**Unlevered beta calculation** removes the debt factor when arriving at the beta figure. As the effect of leverage is removed from the calculation beta figure derived **is said to be more accurate.**
2) "Of the two, **levered beta is said to be more accurate** and realistic as company debt is taken into consideration."
Please let me know if I have this all wrong. Thanks
It's not making a statement on peak vs. trough, more simply good times v. bad times. During good times you would want to purchase a security that is correlated to the market (it will go up with everything). When times are bad, a low beta or even negative beta would be best (if market down, it will be down less or appreciate in value). If you could time the peak or bottom of a market, you are absolutely correct. You would purchase a low beta asset at the top or a high beta asset at the bottom.
The contradictory statements are odd. I suppose the unlevered beta would be the most "accurate" representation of the riskiness of the underlying business. However, levered beta gives the fullest picture of the riskiness of the asset because (in public markets) I'm not aware of a way to isolate the business risk from any of the financial risk it has taken on to finance the business.
Rerum distinctio voluptatibus aut nam quia voluptas. Voluptatibus dolorem et inventore sunt. Soluta illum harum totam. Aut accusamus ut ratione voluptas facilis possimus facilis.
Harum aspernatur pariatur quia quos eum doloribus. Rerum nisi quo qui aut quia at ab. Harum cum ipsam expedita et dignissimos debitis. Eius autem sed quia. Ea alias dolorum in magnam minus quas ut.
Et velit enim nostrum beatae sequi. Delectus odit quae voluptates a.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...