If you are a shareholder in Connected IO Limited’s (ASX:CIO), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. CIO 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. Different characteristics of a stock expose it to various levels 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.

Check out our latest analysis for Connected IO

An interpretation of CIO’s beta

With a beta of 2.18, Connected IO is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, CIO 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 CIO’s size and industry impact its risk?

CIO, with its market capitalisation of AUD A$24.86M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, CIO’s industry, communications, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the communications industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of CIO’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Is CIO’s cost structure indicative of a high 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 examine CIO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, CIO seems to have a smaller 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. However, this is the opposite to what CIO’s actual beta value suggests, which is higher stock volatility relative to the market.