bkballa

pension assets are not included at all. so based on that aspect - the operating assets that were calculated would by nature have a higher beta. Additionally what Mr. Merton is trying to say is - all of this risk (beta) is being assigned to the operating assets - hence to the WACC.

when pension assets (which are part equity and part fixed income) is included - the total beta of the firm's assets reduces (since the equity beta is spread out over a larger base (now including pension liabs)).

pension assets beta is known. total asset beta now gets apportioned between the pension and op assets - so op assets beta will change.

weight is one aspect of it all. but the other bigger part is a new component being included in the calculations (which affects the weight as well).

since the total asset beta changed, the operating asset beta will also change.

it is not a weight thingie alone. (take it for what its worth).

CP