Which of the following best describes levered beta?

Levered beta is a measure that reflects the sensitivity of a company's stock return to overall market movements, specifically accounting for the company's capital structure, including its debt. This means it indicates how much more or less volatile a stock is compared to the market as a whole, incorporating the effects of financial leverage.

When a company has debt, its stock tends to be more sensitive to market movements, as the returns on equity can be amplified (both positively and negatively) by changes in the company's earnings before interest and taxes. Therefore, levered beta provides insight into the risk associated with the equity investment relative to the broader market, capturing how much the stock price might move in response to movements in the market index.

This concept is pivotal in financial modeling, particularly when calculating the cost of equity in the Capital Asset Pricing Model (CAPM), as it directly influences the discount rates used in discounted cash flow analyses. Understanding levered beta helps investors and financial analysts assess the risk-reward profile of their investments, thereby facilitating better decision-making.