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Postby RAHUL PANSARI » Wed Jul 23, 2014 2:24 pm

Hello sir,

My name is Rahul Pansari & I am registered student from Lalkothi, Jaipur Centre.

Sir, You told that Systematic Risk is captured by Beta. And Systematic Risk is due to economy factors which is not arised due to entity's internal factors.
At the same time, you taught in Security Analysis that Beta has two factors, one is due to Risk of the Sector in which entity is engaging and Second is due to Leveraging in the co. (Que of Levaraging- Deleveraging also done on this concept).

So my Doubt is that if Beta not represents internal risk (i.e. unsystematic Risk) then how is of two types- Levered & Unlevered ?
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Re: Beta

Postby administrator » Tue Aug 12, 2014 8:00 pm

1.Every sector is linked to the economy in a unique fashion. Certain sectors like automobile are highly cyclical in nature and respond significantly to changes in economy. If a company present in this sector does business without use of debt, the sensitivity of the company's stock return with respect to the economy represents pure business risk which we call Unlevered beta.
It is illogical for you to find this explanation inconsistent with my earlier statement as you have quoted.
2. At the same time, when a firm uses debt in its capital Structure, it is doing business which is multiple times it's equity funds. As a result the firms entire volatility- systematic as well as unsystematic gets scaled up multiple times. I mean systematic risk represented by beta becomes beta u * [1+ d/e]. Ofcourse even it's unsystematic risk whose calculation we haven't done in security analysis gets scaled up. So we are not counting debt equity ratio as an internal factor. We are counting it as a universal factor which amplifies any type of risk.
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