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Anyone researching Chen Xing Development Holdings Limited (HKG:2286) might want to consider the historical volatility of the share price. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks on the market.
Some stocks are more sensitive to general market forces than others. Beta is a widely used metric to measure a stock's exposure to market risk (volatility). Before we go on, it's worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that 'volatility is far from synonymous with risk.' Having said that, beta can still be rather useful. The first thing to understand about beta is that the beta of the overall market is one. A stock with a beta below one is either less volatile than the market, or more volatile but not corellated with the overall market. In comparison a stock with a beta of over one tends to be move in a similar direction to the market in the long term, but with greater changes in price.
See our latest analysis for Chen Xing Development Holdings
What 2286's beta value tells investors
Given that it has a beta of 1.12, we can surmise that the Chen Xing Development Holdings share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that Chen Xing Development Holdings shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it's also important to consider whether Chen Xing Development Holdings is growing earnings and revenue. You can take a look for yourself, below.
Does 2286's size influence the expected beta?
Chen Xing Development Holdings is a rather small company. It has a market capitalisation of HK$1.2b, which means it is probably under the radar of most investors. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.
What this means for you:
Since Chen Xing Development Holdings has a reasonably high beta, it's worth considering why it is so heavily influenced by broader market sentiment. For example, it might be a high growth stock or have a lot of operating leverage in its business model. In order to fully understand whether 2286 is a good investment for you, we also need to consider important company-specific fundamentals such as Chen Xing Development Holdings’s financial health and performance track record. I highly recommend you dive deeper by considering the following: