CFA and Schweser mention the following formula: Unlevered beta for XYZ = equity beta of XYZ X [1/(debt of XYZ / equity of XYZ)] What is the derivation of this formula?

You had wrong formula. The correct one is Unlevered beta for XYZ = equity beta of XYZ X [1/(1- debt of XYZ / equity of XYZ)] Unlevered beta is the beta if the company had no debt, i.e., financing operations totally by equities. Beta is inversed related with equities. More equities less beta, so that the product of beta* equities stays constant , so that. unleverred beta *(New equities)= unleverred beta *(E+D)= beta *E --> unlevered beta = beta *E/(E+D) = beta/(1+D/E)