How to Unlever Beta: Formula & Examples

Article Summary

“Unlevered beta” is a term used by investors and individuals in investment banking as a way to measure systematic risk, or risk when investing in the market. Unlevered beta is similar to “levered beta,” with one important exception: levered or traditional beta measures debt when calculating risk, whereas unlevered beta takes debt out of the equation. Unlevered beta is a formula that can be used to help measure and understand risk while embracing any upside opportunities of a given investment.

The beta formula is a way of measuring a company’s risk profile. When analysts produce an investment report that analyzes the risk profile of a company, they will typically have a beta formula. They will use either an unlevered beta or levered beta formula.

“Unlevered beta” is a term used for measuring the risk of an investment related to a more macro view of the market as a whole. It is used to measure an investment’s risk when looking at whether a market is more stable or volatile and does not take into account a company’s debt and liabilities. Therefore, it’s used to measure more systematic risks in the market.

Levered beta takes into account the capital structure of a company, including debt. Typically, a company’s debt can have a profound effect on its risk profile.

Unlevered beta traditionally measures a company’s risk and reward profile more in line with the aggregate trends of the market rather than with a focus on that company’s debt and capital structure.

Unlevered beta formula

In the unlevered beta formula, you are accounting for the capital asset pricing model risk while excluding a company’s debt component. When calculating unlevered beta, you would use the following equation:

Unlevered Beta Formula

Unlevered Beta = Levered Beta / [1 + (1 – tax rate) * (debt/equity)]

To use this formula, you must first calculate levered beta. In many cases, the traditional unlevered beta will be provided by an analyst or investment specialist. A beta will be equal to 1, greater than 1, or less than 1.

Understanding beta

Levered beta is also known as beta or equity beta. Below is a table explaining the values of beta:

Value of BetaMovementGrowthResult
Beta = 1Moves in line with market10% move in the market+/- 10% move in investment
Beta > 1More volatile than the market+/- 10% move in the marketgreater than +/- 10% move in investment
Beta < 1Less volatile than the market+/- 10% move in the marketless than +/- 10% move in investment

When a stock or investment has a beta equal to exactly one, then that means the stock or investment should move completely in line with the market. If the market goes up 10%, the stock should increase 10%. Likewise, if the market goes down 10%, then the stock should also go down by around 10%.

When the levered beta value is less than or greater than 1, that means the stock should not move in line with the market — i.e., it will be more volatile. If the beta is greater than 1, then the stock should be more volatile than the market. When the beta is less than 1, the stock should be less volatile than the market overall. Usually, the S&P 500 or a similar major market, like Hangseng, is used to estimate the market variable in this calculation.

For example, imagine based on the capital structure, demand, and debt-to-equity ratio of a certain stock tied to natural gas fracking that a company has a levered beta of less than 1. This would typically mean that regardless of a movement in the overall market, this stock would be relatively stable. If the market were to fall 10%, then this stock would perhaps only fall 2% because its stability supersedes that of the market overall.

Likewise, say a stock in the semiconductor sector with groundbreaking technology has a beta greater than 1. This means that if the market moves upward by 10%, this stock could move 20%. If the market falls 10%, then this stock could fall an additional 20%. Here, the potential risks and rewards are greater due to the stock’s higher volatility.

Capital structure in calculating beta

The capital structure of a company is the distribution of debt and equity that makes up a company’s finances. Different companies can have different capital structures.

Take, for instance, the telecom industry. Due to heavy investment in items like cell phone towers and licenses, these companies will typically operate with a significant amount of debt, particularly at the beginning. Using a significant level of debt to finance a company typically carries more business risk, which will influence its levered beta but not its unlevered beta.

When comparing a telecom stock to others with a lower level of debt, such as wholesalers, the beta can vary significantly due to the different capital structures of other industries. By removing the debt and using only the company’s assets and the market statistics, one can better compare two companies when making an investment decision.

Pro Tip

Typically, when measuring a company’s assets and debt, one uses the debt-to-equity ratio. The debt-to-equity ratio measures the equity and debt used to fuel a company’s business operations. Companies in capital-intensive industries, such as financial services and telecoms, typically will have a high debt-to-equity ratio. Companies in less capital-intensive industries, such as wholesalers, will typically have a lower debt-to-equity ratio.

Unlevered beta’s uses

Unlevered beta is useful because it measures a company’s risk directly correlated to the market. Levered beta is not as good at detecting systematic risk because a company’s debt component can have a huge effect on its risk profile, regardless of the market. Unlevered beta is much better at measuring systematic risk.

Examples of systematic risk

Systematic risk is a risk that is completely out of the control of the company. It represents aggregate risks to an industry or a market. This is extremely important when looking at investments that might be more prone to systematic risk. Below are some examples of systematic risks.


Systematic risk in a political sense is tied to a policy that is out of the direct control of the company. This can be more pronounced in emerging markets, such as the military coup in Myanmar or the Ortega election and subsequent hold of power in Nicaragua.

It can also be measured in more stable countries by policies that affect the taxes and profits of a company. The planned elimination of the carried interest tax loophole for the private equity industry could be considered a systematic risk for the industry as a whole that has nothing to do with each individual company’s business operations or debt-to-equity structure but could nevertheless have a significant effect on the market.

Natural disasters

Natural disasters can also be considered a systematic risk in the market — for example, when investing in companies that are prone to the effects of climate change. Suppose one invests in an agricultural product that grows in an environment prone to drought. This would be a case of a systematic risk that is not correlated to a company’s capital structure.

Inflation and supply chain disruptions

Supply chain disruptions and inflation pose additional systematic risks in the market. In a particularly recent example, the COVID-19 pandemic and subsequent lockdowns disrupted world economies and the global supply chain, leading to the current levels of inflation in the global market.

Due to the multiple systematic risks caused by factors such as geopolitics (e.g., Russian misadventures in Ukraine) and health (e.g., a global pandemic), now is a particularly useful time to add systematic risks to the beta equation when deciding on investments.

Tax rate and unlevered and levered beta

One thing that both unlevered and levered beta have in common is that they take into account the taxes applied to a business. In levered beta, the tax is incorporated to include the cost of debt after tax. In unlevered beta, you will leave out the after-tax debt effect to measure the systematic risks of the market.


How do you calculate unlevered beta?

Unlevered beta is calculated by first finding the levered beta, then dividing it by [(1 + (1 – tax rate) * (debt/equity)].

What is the levered beta formula?

The formula for levered beta is as follows: Unlevered Beta * [(1 + (1 – tax rate) * (debt/equity)]

Is beta levered or unlevered in CAPM?

The beta can be both levered and unlevered under the CAPM.

What is levered vs. unlevered beta?

Levered beta and unlevered beta differ in their inclusion of a company’s debt-to-equity ratio when calculating the beta. Levered beta addresses the unique risks for a company based on its capital structure and operations, whereas unlevered beta addresses more systematic market risks.

Should unlevered beta be higher than beta?

Unlevered beta is typically equal to or lower than beta. This is because a company’s financial obligations and financial leverage have more effect on its volatility.

Key Takeaways

  • Unlevered beta and levered beta are formulas that dictate a company’s growth trajectory when compared to the market.
  • Unlevered beta is calculated by dividing levered beta by [(1 + (1 – tax rate) * (debt/equity)].
  • Unlevered beta is used to calculate systematic risk in the market and to measure how a company will move with the market. As it doesn’t include a company’s debt, it can measure a company’s response to the general market risk.
  • Levered beta is more applicable to a company’s financial situation, as it incorporates the debt component of a company’s assets.
  • Systematic risks can include factors like political coups and natural disasters.
  • The after-tax cost of debt is calculated in both types of beta.
View Article Sources
  1. de Jager, C. (2014). Considering the Dapm: Low-beta and High-beta Industries (thesis). – University of Amsterdam
  2. Beta equation (security) – Nasdaq
  3. Crisis in Nicaragua: Is the Ortega-Murillo Government Leftist? (Part I) –