For Aspen Group’s (ASX:APZ) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures APZ’s exposure to the wider market risk, which reflects changes in economic and political factors. 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.
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An interpretation of APZ’s beta
With a five-year beta of 0.06, Aspen Group appears to be a less volatile company compared to the rest of the market. This means that the change in APZ’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, APZ appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does APZ’s size and industry impact its risk?
APZ, with its market capitalisation of AUD A$106.12M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, APZ also operates in the reits 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 reits industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by APZ’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can APZ’s asset-composition point to a higher 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 test APZ’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, APZ appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect APZ to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. This outcome contradicts APZ’s current beta value which indicates a below-average volatility.