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If you are a shareholder in Ablynx NV’s (ENXTBR:ABLX), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. ABLX is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
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What does ABLX’s beta value mean?
With a beta of 2.12, Ablynx is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, ABLX can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could ABLX’s size and industry cause it to be more volatile?
With a market capitalisation of €3.36B, ABLX is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. In addition to size, ABLX also operates in the biotechs industry, which has commonly demonstrated muted reactions to market-wide shocks. This is an interesting conclusion, since both ABLX’s size and industry indicates the stock should have a lower beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How ABLX’s assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine ABLX’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, ABLX doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ABLX to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This outcome contradicts ABLX’s current beta value which indicates an above-average volatility.