If you are a shareholder in China Assurance Finance Group Limited’s (SEHK:8090), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This 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 of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
See our latest analysis for China Assurance Finance Group
An interpretation of 8090’s beta
With a five-year beta of 0.07, China Assurance Finance Group appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, 8090 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could 8090’s size and industry cause it to be more volatile?
A market capitalisation of HK$1.32B puts 8090 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 8090 also operates in the diversified financial industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the diversified financial industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both 8090’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How 8090’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 8090’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 less than a third of the company’s total assets, 8090 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, 8090’s beta value conveys the same message.