Brief Definition
Levered beta, or equity beta, is a measure of how a company’s stock price moves in relation to the overall market. It considers the impact of the company’s debt on its stock’s volatility. A levered beta greater than 1 means the stock is more volatile than the market, while a levered beta less than 1 means it’s less volatile. Levered beta helps investors understand the risk and potential return of a stock. It considers the company’s debt levels and interest payments when evaluating how the stock reacts to market changes.
Further Explanation
Levered beta, also known as equity beta, is a measure of the sensitivity of a company’s stock price to changes in the overall market. It is a key concept used in the Capital Asset Pricing Model (CAPM) to assess the risk and expected return of an investment.
Levered beta takes into account the financial leverage or debt of a company. It measures how the company’s stock price tends to move in relation to the broader market, considering the influence of both company-specific factors and the impact of debt.
A levered beta greater than 1 indicates that the stock tends to be more volatile than the market. It suggests that the stock price is likely to rise or fall to a greater extent compared to the overall market movement. On the other hand, a levered beta less than 1 suggests that the stock tends to be less volatile than the market.
Calculating levered beta involves analyzing historical stock price data and market returns. It considers the company’s financial structure, including its debt levels and interest payments, which can amplify or dampen the stock’s response to market fluctuations.
Levered beta is a useful metric for investors to assess the risk and potential return of a company’s stock. It helps in evaluating the stock’s sensitivity to market movements and assists in determining an appropriate required rate of return for the investment.
In summary, levered beta is a measure of a company’s stock price sensitivity to changes in the market, taking into account its financial leverage or debt. It helps investors assess the risk and expected return of a stock and is used in the CAPM to determine the required rate of return for an investment.