What i studied in my college about the “asset beta” is like below.
“asset beta = equity beta*{1+(1-t)*(D/E)}”
But, in the CFA exam suggests the following calculation.
“asset beta = equity beta/{1+(1-t)*(D/E)}”
I think that it is totally reversed equation between asset beta and equity beta.
what i have considered as right equation is first equation, because that fits in the idea which is “more debt, more risk(increasing asset beta)”.
How can i understand this situation?
Asset beta is lower than equity beta; the assumption is that the beta of liabilities is zero, so only a portion of the assets’ returns changes when market returns change.
CFA Institute has it correct.
Thanks for your answer~!!
And i understand the two equations as below.
1.“(leveraged) asset beta = (unleveraged) equity beta*{1+(1-t)*(D/E)}”
where, the unleveraged equity beta is equal to unleveraged asset beta
2.“(leveraged) asset beta = (leveraged) equity beta/{1+(1-t)*(D/E)}”
Isn’t it right?
No, it’s reverse:
βAsset = unlevered (100% equity)
βEquity = levered (equity plus debt)
Best,
Oscar
OK~! then,
“(leveraged) equity beta = (unleveraged) equity beta*{1+(1-t)*(D/E)}”
I think it’s just a matter of perspective.