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Anyone researching China Rare Earth Holdings Limited (HKG:769) might want to consider the historical volatility of the share price. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.
Some stocks are more sensitive to general market forces than others. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said ‘volatility is far from synonymous with risk’ in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
See our latest analysis for China Rare Earth Holdings
What we can learn from 769’s beta value
Given that it has a beta of 1.38, we can surmise that the China Rare Earth Holdings share price has been fairly sensitive to market volatility (over the last 5 years). If the past is any guide, we would expect that China Rare Earth Holdings shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it’s also important to consider whether China Rare Earth Holdings is growing earnings and revenue. You can take a look for yourself, below.
Could 769’s size cause it to be more volatile?
With a market capitalisation of HK$796.2m, China Rare Earth Holdings is a very small company by global standards. It is quite likely to be unknown to most investors. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.
What this means for you:
Since China Rare Earth Holdings tends to moves up when the market is going up, and down when it’s going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether 769 is a good investment for you, we also need to consider important company-specific fundamentals such as China Rare Earth Holdings’s financial health and performance track record. I urge you to continue your research by taking a look at the following: