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Beta Big Picture

This document discusses different types of betas: 1) Unlevered or asset betas refer to the risk of the underlying businesses and assets, without considering a company's capital structure. 2) Equity betas are always levered betas, reflecting both the risk of the underlying businesses as well as the financial leverage from the use of debt. 3) The bottom-up beta approach first calculates unlevered betas and then leverages them using the company's debt-to-equity ratio to arrive at an equity beta. Regression analysis of stock returns provides an observed equity beta but it reflects the specific businesses, time period studied, and average leverage over that period.

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23 views2 pages

Beta Big Picture

This document discusses different types of betas: 1) Unlevered or asset betas refer to the risk of the underlying businesses and assets, without considering a company's capital structure. 2) Equity betas are always levered betas, reflecting both the risk of the underlying businesses as well as the financial leverage from the use of debt. 3) The bottom-up beta approach first calculates unlevered betas and then leverages them using the company's debt-to-equity ratio to arrive at an equity beta. Regression analysis of stock returns provides an observed equity beta but it reflects the specific businesses, time period studied, and average leverage over that period.

Uploaded by

10jatin
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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A Big Picture View of Betas

When we talk about unlevered betas, we are talking about the betas on the asset side of the balance sheet. These betas are also referenced as business betas, asset betas or pure play betas. The beta for equity is always a levered beta, reecting the risk of the businesses you are in and the magnifying effect of debt.

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In the bottom up beta approach; a. You take a value-weighted average of the business betas to get to a beta for the rm. b. You then lever up that beta using the D/E ratio for the rm.

When you run a regression of stock returns against a market index, you are getting an equity beta. However a. That beta estimate is noisy b. Reects the businesses you were in over the regression period. c. The average D/E ratio in the regression

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