medium · Investment Banking valuation-core

When unlevering a peer group's beta, an analyst observes that BetaCo has a significantly higher levered beta (β_L = 1.6) than the group average (β_L = 1.1). However, BetaCo also has a D/E ratio of 1.5, while the group average D/E is 0.4. After unlevering, BetaCo's asset beta (β_U) is likely to be:

1. In line with the peer group average.
2. Negative, indicating an inverse relationship with the market.
3. Significantly higher than the peer group average.
4. Exactly 1.0, matching the market risk.

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