Principles of Finance/Section 1/Chapter 6/Corp/Beta

From Wikibooks, open books for an open world
Jump to: navigation, search

A corporations Beta is a measurement of its volatility. A high beta has high volatility in response to the market. A low beta company has low volatility, such as utilities companies.


Asset Beta and Equity Beta[edit]

Since companies are structured differently, it becomes necessary to distinguish between Asset, or Unlevered Beta, and Equity, or Levered Beta. The Equity beta is what is commonly reported on financial websites, such as finance.yahoo.com. However, to perform certain financial functions, such as valuing a company, the use of the Unlevered, or Asset Beta is necessary. This is the company's beta if one were to assume it were financed entirely by equity.

\beta_{L} = \beta_{U}\left[1+(1-T)\frac{D}{E}\right]