If you are looking to invest in Alpha Pyrenees Trust Limited’s (LSE:ALPH), 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. ALPH 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 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.
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What does ALPH’s beta value mean?
Alpha Pyrenees Trust’s five-year beta of 2.49 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, ALPH 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 ALPH’s size and industry impact its risk?
A market capitalisation of UK£70.58K puts ALPH in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the reits industry, which has been found to have high sensitivity to market-wide shocks. 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 ALPH’s individual beta value we discussed above.
How ALPH’s assets could affect its 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 test ALPH’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 an insignificant portion of total assets, ALPH doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ALPH 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 ALPH’s actual beta value suggests, which is higher stock volatility relative to the market.