ACCA Financial Management (F9) Certification Practice Exam

What distinguishes 'Equity Beta' from 'Asset Beta'?

1. It only considers business risk

2. It includes both business risk and financial risk

3. It factors in only leverage risk

4. It measures risk for creditors

The correct answer is: It includes both business risk and financial risk

Equity Beta is a measure that reflects the volatility of a company’s equity returns in relation to the overall market returns, taking into account both the business risk and the financial risk associated with the equity. This means that Equity Beta incorporates the effects of leverage, as companies with more debt are usually perceived to be riskier; thus, their equity is more sensitive to changes in the market. In contrast, Asset Beta, also known as unlevered beta, measures the risk of the company's assets without the impact of leverage. It solely focuses on the business risk inherent in the company’s operations. Since it adjusts for the differences in financial structure among companies, Asset Beta helps in comparing the operational risks of different firms regardless of how they are financed. The correct choice reflects the comprehensive nature of Equity Beta. It considers not just the inherent risks from the firm's operations (business risk) but also adjusts for how much financial risk is introduced through leverage, which impacts equity returns for shareholders. This distinction is crucial for investors and analysts when assessing the total risk associated with investing in a company’s equity compared to its assets alone.