ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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What does 'geared beta' specifically refer to?

Equity beta considering financial leverage
Asset beta without liabilities
Comparison of market and company risk
Total risk of the investment portfolio

The correct answer is: Equity beta considering financial leverage

Geared beta specifically refers to the equity beta of a company after taking into account its financial leverage. This measure reflects the systematic risk of a company's equity in relation to the overall market, adjusted for the company's debt levels. When a company has debt, the equity holders assume additional risk because they are last in line to receive payments in the event of liquidation. As a result, when financial leverage increases, the geared beta also typically increases, signifying that equity holders face greater risk and potential return. In contrast, asset beta, which is not geared, measures the risk of the company's assets without accounting for financial leverage. This represents the risk inherent in the business operations, excluding the effects of financing decisions. Comparisons of market and company risk do not specifically define geared beta, while the total risk of the investment portfolio encompasses all types of risk, not just beta related to equity or financial leverage. Understanding geared beta is crucial for investors when assessing the risk-return profile of leveraged companies.