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Unlevered vs levered beta

Published August 17, 2026

Levered beta is the equity beta: how hard the residual claim moves with the market. Unlevered beta strips financial leverage out of that number, assuming debt beta is zero. An equity beta of 1.2, a 25 percent tax rate, and D/E of 0.5 produce an asset beta of 0.8727.

	Unlevered beta	Levered beta
What it measures	The beta of the operations, as if they were all-equity financed.	The beta of the residual claim, with the current mix of debt already in it.
Teaching sheet	Hamada factor $1 + (1-0.25)\times 0.5 = 1.375$ . Asset beta $1.2 / 1.375 = 0.8727$ .	Equity beta 1.2. Relevered at the same D/E is 1.2 again.
No debt	D/E of 0. Asset beta equals equity beta: 1.2.	Still 1.2. There was no financial leverage to strip.
A more borrowed sheet	Equity beta 1.5, tax 21 percent, D/E of 1. Asset beta $1.5 / 1.79 = 0.8380$ .	1.5. Relevering 0.8380 at the same D/E returns 1.5.
Which one goes into CAPM	Neither, directly. Unlever, then relever at the target D/E, then put that equity beta into the cost of equity.	The current equity beta, if you are pricing this firm's current residual claim.
Usual mistake	Feeding D/(D+E) into a formula that wants D/E. One third is not 0.5.	Putting this firm's 1.2 into a WACC for a different capital structure.

On this page

Strip the financing out, then put a target mix back in

Equity beta moves with financial leverage. The same swing in operating results lands on a thinner slice of equity when the firm has borrowed, so the printed beta is larger than the beta of the assets.

Hamada's identity, with debt beta taken as zero, undoes that. The Hamada factor is $1 + (1-t)(D/E)$ . On this sheet that is 1.375. Divide 1.2 by 1.375 and the unlevered beta is 0.8727. Relever at the same D/E and you are back at 1.2. If you are putting this beta into a WACC for a different capital structure, relever at the target D/E, not at the firm's current one. That is the whole point of unlevering first.

How unlevered beta works is the identity. The unlevered beta calculator is the working page. How leverage ratio works is the D/E that sits in the factor.

Debt beta of zero is a teaching convention

Hamada treats debt as having no market beta. Distressed debt has a beta of its own, and Miles-Ezzell is a different identity. This page is the one-line unlevering a first deal model actually uses.

Set D/E to 0 and the factor is 1: asset beta equals equity beta. That is the check that the identity has not grown a constant of its own. This is educational material, not financial advice.

Worked examples

Equity beta 1.2, tax 25 percent, D/E 0.5

Equity beta is 1.2, the tax rate is 25 percent, and debt-to-equity is 0.5. What is unlevered beta?

Hamada factor: $1 + (1 - 0.25)\times 0.5 = 1.375$ .
Asset beta: $1.2 / 1.375 = 0.872727$ , which prints as 0.8727.
The other walk, with E = 1 and D = 0.5: $1.2 \times 1 / (1 + 0.5\times 0.75) = 1.2 / 1.375$ .

Unlevered beta is 0.8727. The Hamada factor is 1.375. Relevered at the same D/E is 1.2.

The same beta with no debt

Keep equity beta at 1.2 and tax at 25 percent. Set D/E to 0. What is asset beta?

Hamada factor: $1 + (1 - 0.25)\times 0 = 1$ .
Asset beta: $1.2 / 1 = 1.2$ .

Asset beta is 1.2, equal to equity beta. There was no financial leverage to strip.

Equity beta 1.5, tax 21 percent, D/E 1

Equity beta 1.5, tax rate 21 percent, debt-to-equity 1. What is unlevered beta?

Hamada factor: $1 + (1 - 0.21)\times 1 = 1.79$ .
Asset beta: $1.5 / 1.79 = 0.837988$ , which prints as 0.8380.
Relevered: $0.8380 \times 1.79 = 1.5$ .

Unlevered beta is 0.8380. The Hamada factor is 1.79. Relevered at the same D/E is 1.5.

Common questions

Is levered beta just a worse unlevered beta?

No. It is the right beta for the current residual claim. It is the wrong beta to drop into a WACC for a different mix. Unlever, then relever at the mix you are pricing.

Why is debt beta assumed to be zero?

That is the Hamada teaching convention. Distressed debt has a beta of its own. This page does not estimate one.

Where does 0.8727 go next?

Into a relevering at the target D/E, then into the cost of equity, then into WACC.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.