anybody knows why higher levered firm should have higher betas??
First, make clear the difference between asset beta and equity beta. Asset beta reflects an unlevered firm, and equity beta reflects a levered firm.
An asset beta reflects systematic risk or market risk the company is exposed assuming no debt. If you add debt to the company, its risk will increase, so beta must be adjusted to reflect not only market risk, but leverage risk. Thats why equity beta is higher than asset beta.
because the beta of the debt is very low, nearly 0 so the equity beta is higher than the firm beta, right?
if a firm is higher levered, doesn’t that mean it should have a relatively lower beta because it consists of more debts?
First, note that the firm’s beta is the equity beta, also called levered beta.
Second, don’t assume that if the debt beta is zero, adding more debt to the capital structure will reduce the equity beta (like if this were a wacc were more debt reduces wacc). This is not the same, beta reflects volatility of the company returns in comparisson to the market returns, so adding debt increases the risk of the company which means a higher probability of higher looses.
In conclusion, equity beta will always be higher than asset beta when the firm is levered.
This logic matchs with the logic that we require a higher rate of returns to higher risky projects. In the CAPM we use beta to calculate required rates of return.
I am sure you are talking about and equity beta here.
An equity beta will be higher for a higly levered firm because it is a levered beta. It has the effect of the firm’s capital structure.
However, if you are talking about an asset beta the answer may vary according to different scenarios.