can someone please explain the difference between equity and asset beta? And what each one is used for in IB.
I have been trying to find some decent info on Google for quite a while now and haven't had any luck.
Equity Beta is also commonly refered to as levered beta and offers a measure of how volatile a given stock's price movement is relative to the overall market's movement.
Equity Beta accounts for the company's capital structure - meaning that if the company has loaded up on debt it will be more volatile than companies that have less debt within the capital structure.
This is the beta that is typically found on financial websites such as Yahoo Finance.
Equity Beta vs. Asset Beta
Asset Beta measures how volatile the underlying business is without considering capital structure. You calculate asset beta by removing the capital structure impact on the equity beta. Asset beta is also frequently refered to as unlevered beta.
This beta allows investors to compare the relative volatility of assets stripping out the effect of capital structure choices.
This is important as it allows investors to find an optimal capital structure by finding the average asset beta of industry and then taking the average asset beta of the industry and then "re-levering" it with the target company's capital structure with the following equation.
Asset Beta = equity beta / (1+(1-taxrate)*(debt/equity ratio))
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