An Unleveraged Beta, or Asset Beta, is a financial tool used to measure the market risk of a company without considering the impact of its debt. It’s a neutral measurement as it reveals what the company’s risk would be if it had no debt at all. This makes Unleveraged Beta a useful tool for comparing companies with different capital structures.
1. How does Unleveraged Beta differ from Leveraged Beta?
Unleveraged Beta measures a company’s risk regardless of its capital structure, whereas Leveraged Beta does consider the company’s debt. Thus, Leveraged Beta can give a skewed perception of risk if comparing two companies with different levels of debt.
2. How is Unleveraged Beta calculated?
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Unleveraged Beta is calculated by dividing the Leveraged Beta by 1 plus the product of the tax-adjusted debt-to-equity ratio and (1 – tax rate).
3. What does a high Unleveraged Beta suggest?
A high Unleveraged Beta suggests that the company’s returns are highly responsive to changes in the market. Thus, the company is often considered riskier.
4. How does Unleveraged Beta relate to investing?
Investors use Unleveraged Beta to assess a company’s inherent risk when creating a diverse stock portfolio. It can help them decide which stocks to choose based on risk tolerance.
5. Do all companies have the same Unleveraged Beta?
No, Unleveraged Beta differs from one company to another. It’s significantly affected by factors such as the company’s industry, size, operating leverage, and other business risk aspects.