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Anyone researching Wonderful Sky Financial Group Holdings Limited (HKG:1260) 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 other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient 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 greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
View our latest analysis for Wonderful Sky Financial Group Holdings
What we can learn from 1260’s beta value
Looking at the last five years, Wonderful Sky Financial Group Holdings has a beta of 1.26. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. Based on this history, investors should be aware that Wonderful Sky Financial Group Holdings are likely to rise strongly in times of greed, but sell off in times of fear. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see Wonderful Sky Financial Group Holdings’s revenue and earnings in the image below.
Could 1260’s size cause it to be more volatile?
Wonderful Sky Financial Group Holdings is a noticeably small company, with a market capitalisation of HK$1.4b. Most companies this size are not always actively traded. 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 Wonderful Sky Financial Group 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 1260 is a good investment for you, we also need to consider important company-specific fundamentals such as Wonderful Sky Financial Group Holdings’s financial health and performance track record. I highly recommend you dive deeper by considering the following: