Hi Everyone, Please help clarify my understanding of Beta. Beta measures Business Risk and Financial Risk. But, Unlevered Beta measures Market Risk of a company without leverage, which is essentially the business risk of the assets. So, can you distinctly say that Beta is a measure of systematic risk? I’m tripped up on this concept because of the inclusion of the phrase “Market Risk” when talking about Unlevered Beta. Standard Deviation is a measure of Total Risk…so what exactly is Beta and how does it differ from Std. Dev.? Thanks for the help!
yes beta is systematic risk.
Standard deviation is the variance around its mean. Beta is the volatility of an asset relative to the market. One is an an absolute, the other is relative. A beta of 2.0 is thought to be twice as volatile as that of the market.
Beta does not measure financial risk. it only measure market risk (systematic risk). Unlevered beta is basically the asset beta of a company which is independent of the capital structure of the company. suppose you have invested $1000 in a business either your own contribution or 50% your own and 50% borrowed. the gross return without considering the interest impact will be the same. bcoz unlevered beta or asset beta actually captures the riskiness of the assets only, independent of the capital structure. when the asset beta/unlevered beta is adjusted for the respective leverage or capital structure of a company/ project, we get a equity/project beta. Unlevered beta/asset beta/=equity beta((1/1+(1-tax)(D/E)) Project beta=asset beta(1+(1-tax)(D/E))
And don´t forget that beta is a standardized measure of risk, whereas the covariance is not standardized… Daniel www.lambert-shop.net