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Why is it problematic to estimate equity beta for non listed company while equity beta for listed company can be estimated with great deal of accuracy.
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Equity beta has 2 components, the financial risk and business risk.
When you de-gear an equity beta to convert it to an asset beta, this will only reflect the business risk.
The business risk is made of 2 components, systematic (market) risk and unsystematic (specific) risk.
Beta theory assumes that investors are well diversified so have diversified away the unsystematic risk (for example the quality of management, industrial action) and only require a return for systematic risk (market risk).
The systematic risk is measured by observing the correlation of the returns of a share with the returns of the market as a whole, if they both move in the same direction, there is perfect positive correlation of +1.
The problem with unlisted companies shares is that they can’t be compared with the market return as they are not traded, for that reason a comparable beta is taken from a similar listed companies in terms of same business risk.
Good luck tomorrow!!
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