If you are a shareholder in Core Exploration Limited’s (ASX:CXO), 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. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value 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.

See our latest analysis for Core Exploration

What is CXO’s market risk?

With a beta of 1.41, Core Exploration 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, CXO 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 CXO’s size and industry impact its risk?

CXO, with its market capitalisation of AU$31.76M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, CXO’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with CXO’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Is CXO’s cost structure indicative of a high 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 examine CXO’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, CXO appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect CXO to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, CXO’s beta value conveys the same message.