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Anyone researching Ausgold Limited (ASX:AUC) 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. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
Check out our latest analysis for Ausgold
What AUC’s beta value tells investors
Zooming in on Ausgold, we see it has a five year beta of 0.85. This is below 1, so historically its share price has been rather independent from the market. This suggests that including it in your portfolio will reduce volatility arising from broader market movements, assuming your portfolio’s weighted average beta is higher than 0.85. 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 Ausgold’s revenue and earnings in the image below.
Does AUC’s size influence the expected beta?
Ausgold is a noticeably small company, with a market capitalisation of AU$16m. Most companies this size are not always actively traded. Companies with market capitalisations around this size often show poor correlation with the broader market because market volatility is overshadowed by company specific events, or other factors. It’s worth checking to see how often shares are traded, because very small companies with very low beta values are often only thinly traded.
What this means for you:
One potential advantage of owning low beta stocks like Ausgold is that your overall portfolio won’t be too sensitive to overall market movements. However, this can be a blessing or a curse, depending on what’s happening in the broader market. In order to fully understand whether AUC is a good investment for you, we also need to consider important company-specific fundamentals such as Ausgold’s financial health and performance track record. I highly recommend you dive deeper by considering the following: