can someone please explain the difference between equity and asset beta? And what each one is used for in
I have been trying to find some decent info on Google for quite a while now and havent had any luck.
Equity Betais also commonly refered to aslevered betaand offers a measure of how volatile a given stocks price movement is relative to the overall markets movement.
Equity Betaaccounts for the companys capital structure – meaning that if the company has loaded up on debt it will be more volatile than companies that have less debt within the capital structure.
This is the beta that is typically found on financial websites such as Yahoo Finance.
Asset Betameasures how volatile the underlying business is without considering capital structure. You calculate asset beta by removing the capital structure impact on the equity beta. Asset beta is also frequently refered to asunlevered beta.
This beta allows investors to compare the relative volatility of assets stripping out the effect of capital structure choices.
This is important as it allows investors to find anoptimal capital structureby finding the average asset beta of industry and then taking the average asset beta of the industry and then re-levering it with the target companys capital structure with the following equation.
Asset Beta = equity beta / (1+(1-taxrate)*(debt/equity ratio))
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Equity beta = how volatile a given stocks price movements tend to be relative to the overall markets movements. Takes into account the companys capital structure (so if a company loads up on debt you will see that it tends to be more volatile than it would otherwise be as it trades in the stock market).
Asset beta = how volatile the underlying business is, irrespective of capital structure. You calculate asset beta by stripping out the capital structure impacts on the equity beta.
asset beta = equity beta / (1+(1-taxrate)*(debt/equity ratio))
An asset beta is important because you can compare companies and not have the comparison be affected by capital structure choices. What is frequently done to figure out a companys discount rate is to take the average asset beta of the companys peers and then re-adjust that asset beta into an equity beta based on what you think the right long-term capital structure is.
I have been having issues with equity and asset beta. This explanation was explicit. Thank you.
Downtown is right on the money. Youll also sometimes hear asset beta referred to as unlevered beta.
also, the application is that if youre looking at a company and you want to compare it to a set youll have to unlever and relever its beta…
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What about when people refer to the systematic and unsystematic components of beta and extend the definitions with other terms like business and diversifiable risk. Would it be right to say that asset beta is the unsystematic part of equity beta? If not, how do all the terms relate?
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Intuitive Explanation of The Levered Beta Formula
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