If you are a shareholder in PowerShares QQQ Trust Series 1’s (NASDAQ:QQQ), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures QQQ’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 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 is QQQ’s market risk?
PowerShares QQQ Trust Series 1 has a beta of 1.11, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, QQQ may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
How does QQQ’s size and industry impact its risk?
QQQ has a market capitalization of USD $58.97B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. Conversely, the company operates in the capital markets industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of QQQ but a higher beta for the capital markets industry. This is an interesting conclusion, since its size suggests QQQ should be less volatile than it actually is.
Can QQQ’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test QQQ’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in QQQ’s operations, it has low dependency on fixed costs to generate revenue. 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. This outcome contradicts QQQ’s current beta value which indicates an above-average volatility.