Beta
Definition
Beta measures a stock's systematic risk — the sensitivity of its returns to the overall market's returns. A beta of 1.0 moves with the market; above 1.0 amplifies market moves (typical of cyclical, high-fixed-cost, or levered businesses); below 1.0 dampens them (utilities, consumer staples). Statistically, beta is the slope of a regression of the stock's returns on the market's returns.
Observed (levered) betas embed each company's capital structure, so to compare business risk across companies you unlever: unlevered beta = levered beta / (1 + (1 − tax rate) x debt/equity), using the standard Hamada-style formula (conventions vary on debt beta and the tax term). You then relever at the target capital structure: levered beta = unlevered beta x (1 + (1 − t) x D/E).
In a DCF for a private company or a division, the standard approach is to take comparable companies' levered betas, unlever each, average the unlevered betas, and relever at the subject's target capital structure.
Why interviewers ask
"How would you get the beta for a private company?" (unlever comps, average, relever) is a top-five valuation question, and interviewers may ask you to write the unlevering formula. Traps: forgetting the (1 − t) term, relevering at the comps' rather than the target's capital structure, and confusing systematic risk with total volatility.
Related terms
Interviews don't test definitions — they test recall under pressure.
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