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Leveraged beta

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Definition of Leveraged beta

Leveraged Beta Image 1

Leveraged beta

The beta of a leveraged required return; that is, the beta as adjusted for the degree of
leverage in the firm's capital structure.



Related Terms:

Unleveraged beta

The beta of an unleveraged required return (i.e. no debt) on an investment when the
investment is financed entirely by equity.


Beta

A measure of the riskiness of a specific security compared to the
riskiness of the market as a whole; measure of the systematic risk
of a security or a portfolio of securities


Beta

The price volatility of a financial instrument relative to the price
volatility of a market or index as a whole. beta is most commonly used with
respect to equities. A high-beta instrument is riskier than a low-beta
instrument.


beta

Sensitivity of a stock’s return to the return on the market
portfolio.


Beta coefficient

A measurement of the extent to which the returns on a given stock move with stock market.



Beta equation (Mutual Funds)

The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund


Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock


Leveraged Beta Image 2

Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.


Beta risk

Risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.


Country beta

Covariance of a national economy's rate of return and the rate of return the world economy
divided by the variance of the world economy.


Expected return-beta relationship

Implication of the CAPM that security risk premiums will be
proportional to beta.


Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.


Fundamental beta

The product of a statistical model to predict the fundamental risk of a security using not
only price data but other market-related and financial data.


Highly leveraged transaction (HLT)

Bank loan to a highly leveraged firm.


Leveraged buyout

The purchase of one business entity by another, largely using borrowed
funds. The borrowings are typically paid off through the future cash flow of
the purchased entity.


Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in
such investments.


Leveraged Beta Image 3

leveraged buyout (LBO)

Acquisition of the firm by a private group using substantial borrowed funds.


Leveraged equity

Stock in a firm that relies on financial leverage. Holders of leveraged equity face the
benefits and costs of using debt.



Leveraged lease

A lease arrangement under which the lessor borrows a large proportion of the funds needed
to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the
borrowing.


Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.


Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.


Leveraged required return

The required return on an investment when the investment is financed partially by debt.


Unleveraged required return

The required return on an investment when the investment is financed entirely
by equity (i.e. no debt).


Zero-beta portfolio

A portfolio constructed to represent the risk-free asset, that is, having a beta of zero.



 

 

 

 

 

 

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