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If you are a shareholder in Starrise Media Holdings Limited’s (SEHK:1616), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
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An interpretation of 1616’s beta
Starrise Media Holdings’s beta of 0.36 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in 1616’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, 1616 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does 1616’s size and industry impact the expected beta?
With a market cap of HK$878.32M, 1616 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the luxury industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap 1616 but a low beta for the luxury industry. This is an interesting conclusion, since both 1616’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How 1616’s assets could affect its 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 1616’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%, 1616 appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of 1616 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what 1616’s actual beta value suggests, which is lower stock volatility relative to the market.