What does Levered Beta represent?

Levered Beta represents the risk of a company's stock that takes into account its capital structure, particularly the use of debt. Specifically, it is the unlevered beta adjusted for financial risk, which means it reflects not only the risk of the company's operating assets but also the additional risk introduced by the financial leverage (debt) used in the company’s operations.

When a firm has debt, it increases the volatility of its equity returns relative to the market, as changes in the company's performance will impact equity holders more significantly. The more debt a firm has, the more sensitive its equity is to market movements, which results in a higher levered beta compared to the unlevered beta.

This distinction is crucial in financial analysis because investors need to understand the risk associated with a firm's equity while considering its debt levels. Levered Beta is particularly important in models like the Capital Asset Pricing Model (CAPM), where it is used to determine the expected return on equity based on its risk relative to the market.

In contrast, the other options do not accurately reflect the definition of Levered Beta. The option that claims it is the firm's beta coefficient with no debt misrepresents the concept, as that describes unlevered beta. The notion of an