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For Argo Investments Limited’s (ASX:ARG) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. ARG 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 all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.
See our latest analysis for Argo Investments
What is ARG’s market risk?
With a five-year beta of 0.39, Argo Investments appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, ARG appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does ARG’s size and industry impact its risk?
ARG has a market capitalization of AU$5.52B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. But, ARG’s industry, capital markets, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a low beta for the large-cap nature of ARG but a higher beta for the capital markets industry. This is an interesting conclusion, since its industry suggests ARG should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How ARG’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 ARG’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in ARG’s operations, it has low 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. This is consistent with is current beta value which also indicates low volatility.