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sir Asset beta looks only at the business risk (Risk of particular type of business in the market) and equity beta looks at both business risk + gearing risk.
1)So if debt is 0. then asset beta= equity beta. My question is ” Asset beta depends only on the type of business (riskiness of the nature) itself + the market factors (Inflation and economy mechanisms) only??? right?
2)So if company has 0 gearing it shares are only driven by market factors and has no other risks??? (Asset beta, namely business risk is the only risk for shares)
3)is it all relevant only for ordinary shares ??
I show in my lectures on gearing how gearing creates extra risk for shareholders.
Since the equity beta measures the risk of the share, then with gearing it will be higher than the asset beta, and without gearing it will be the same as the asset beta.
Shares have both systematic risk (which is what the beta measures) and unsystematic (company specific) risk. However, we assume always that shareholders are well-diversified and therefore it is only the systematic risk that determines the return that shareholders required.
CAPM applies to all investments – ordinary shares, preference shares, bonds. It is the beta of the investment that determines the return required. Preference share and bonds will have very low betas because they are both fixed dividend/interest. The exam only asks calculations using betas in relation to ordering shares.
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