Beta (β)
Investment Banking glossary · Investment Banking Valuation
Definition
Systematic (non-diversifiable) risk relative to the market. Levered beta β_L — observed from stock returns — captures both business risk and financial risk from leverage. To compare across peers with different capital structures, unlever: β_U = β_L / left[1 + (1-t)· D/Eright]. Then relever at the target's capital structure: β_L = β_U · left[1 + (1-t)· D/Eright]. Used as the CAPM input for the cost of equity.
Beta (β) in plain English
Beta measures how wildly a stock swings compared to the overall market — the risk you CAN'T dodge just by owning lots of different stocks. A beta of 1 moves in lockstep with the market; a beta of 2 swings twice as hard; 0.5 swings half as much. Here's the subtlety: a stock looks jumpier if the company carries a lot of debt (borrowing amplifies ups and downs), so to fairly compare two companies you strip out their debt effect ("unlever") and then re-add the debt of the one you're studying ("relever"). This cleaned-up risk number then feeds a standard formula (CAPM) that estimates what return shareholders demand for taking on that risk.
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