Asset beta
DCFBeta with the effect of leverage stripped out, describing the risk of the business itself.
Also written: unlevered beta
Asset beta is what a company's beta would be if it carried no debt. It isolates the risk of the operations from the risk added by how those operations were financed.
Because it is capital structure neutral, it is the only version that can be meaningfully compared or averaged across peers. Two companies in the same industry should have similar asset betas even if one is heavily levered and the other is debt free.
It is the middle step in the standard procedure: take each peer's observed levered beta, unlever it using that peer's own debt to equity ratio and tax rate, average the results to get a sector asset beta, then relever at your target's structure.
It is also the right input for an adjusted present value analysis, where the unlevered business is valued first at the unlevered cost of equity and the financing effects are added separately.
Worked example
Three peers show levered betas of 1.45, 1.10 and 1.62 at very different debt loads.
Unlevered they become 1.00, 0.96 and 0.99. The spread almost vanishes, which is the evidence that they really are in the same business and only their balance sheets differed.
Averaging the observed levered betas instead would have given 1.39, a number describing no company's business risk in particular.