If you are looking to invest in China Finance Online Co Limited’s (NASDAQ:JRJC), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. JRJC is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not every stock is exposed 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 JRJC’s beta

China Finance Online has a beta of 1.94, 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, JRJC will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

How does JRJC’s size and industry impact its risk?

With a market cap of US$46.06M, JRJC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, JRJC also operates in the internet industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with JRJC’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

How JRJC’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 JRJC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, JRJC doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect JRJC to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what JRJC’s actual beta value suggests, which is higher stock volatility relative to the market.