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Hello,
I have undersrtood B as measure of Market risk or systemmatic risk that is particular to a specific sector or type of businesses so we say Beta for Oil Companies shares Beta for telephone companies Shares and this understanding i have got from your lecutrer and ur explanation of subject
however, i cannot understand how there is a need to remove the ffect of gearing from a Beta of speicic company while this specific company has no Beta the bet for X company which is in Oil sector is the Beta for ALL companies in that sector so How come we need to remove the gearing from B for specific company while we have th e Beta figure for general not speciifc companeis..plkease advice!!
The betas that are published are the betas of shares.
Gearing in a company makes the shares more risky and therefore the share will have a higher beta.
Therefore, just because a share in one company has a higher beta than a share in another company it does not automatically mean that the company is in a more risky business – it could be just because it has higher gearing.
If we want to compare the riskiness of different company’s activities then we need to remove the effect of the gearing and look at the asset beta (or ungeared beta).
Similarly, if we have the general or average beta for shares in a particular industry, then (unless you are told differently in the question) this will take into account the average gearing of those companies. We therefore need to remove the average gearing to get the beta of the industry itself.
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