Levered vs. unlevered beta
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
4 min read · updated July 2, 2026
Beta measures how much a stock moves with the market, and it's the only company-specific dial in CAPM. But here's the catch that trips people up: the beta you observe for a public company is polluted by that company's debt. Two identical businesses with different debt loads will show different betas, purely because of how they're financed. So before you use a beta, you scrub the financing out.
That scrub is the levering/unlevering process, and it's one of the most common "do you actually understand this" questions in a valuation interview.
Why debt inflates beta
Debt adds a fixed claim that sits ahead of equity holders. Interest gets paid whether the business has a good year or a bad one. So when profits swing, the equity, which is what's left after debt is served, swings even harder. More leverage means a bumpier ride for shareholders, which shows up as a higher observed beta.
That extra bumpiness has nothing to do with the underlying business. It's just financing. So the raw beta you pull from a data service blends two things:
- Business risk: how cyclical the actual operations are.
- Financial risk: how much debt is amplifying those swings.
Unlevered beta (also called asset beta) is pure business risk. It answers "how risky are these operations if the company had no debt at all." Levered beta (also called equity beta) is business risk plus financing risk. When you compare companies or value one, you want to isolate the business risk first, then bolt on the specific financing you care about.
Keep reading
The rest of this lesson is free with an account
There's about 2 more minutes of Levered vs. unlevered beta below this, plus every other lesson in DCF. Free account, no card.
Any partner school .edu
Frequently asked
- What is the difference between levered and unlevered beta?
- Levered beta, also called equity beta, is business risk plus financing risk, the raw beta you observe for a public company. Unlevered beta, or asset beta, strips out the debt to leave pure business risk, answering how risky the operations would be with no debt at all. Debt makes equity swing harder, so it inflates the observed beta.
- How do you unlever and relever beta?
- To unlever, divide the levered beta by one plus one minus the tax rate times debt-to-equity, which strips out a comp's capital structure. To relever, multiply the asset beta by that same bracket using your target's own debt-to-equity. Unlevering divides, relevering multiplies, and the relevered beta is what goes into CAPM.
- Why do you unlever and relever beta instead of using a comp's raw beta?
- Because a raw beta is polluted by that company's debt, so using it straight imports the comp's balance sheet into your valuation. You unlever each comp to isolate business risk, average, then relever at your target's leverage. It matters most when the target and comps have very different capital structures.
LearnAI