The Unlevered Systematic Risk Analysis: A New Bottom up Approach

The aim of the current paper is to propose a bottom-up approach as a complement in risk return analyses, particularly suitable for private firms and divisional evaluation. In those countries where private firms are more common than public firms, firm’s economic fundamentals are more significant than market data. In this case, the use of a bottom up approach for the beta estimation is more suitable than a top down method, because it allows to consider both environmental and business drivers of risk and to study the systematic risk as a function of firm fundamentals. The paper is structured in three sections: in the first section, there is the literature review on the CAPM and the beta estimation; in the second section, there is the explanation of the model -a bottom up approach to unlevered risk - considering the role of the intrinsic business risk and of the operating leverage; finally, it is presented the analysis of the unlevered beta, according the bottom up model, both in stationary and the dynamic states.