If you are a shareholder in The Hong Kong Building And Loan Agency Limited’s (SEHK:145), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures 145’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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.

Check out our latest analysis for Hong Kong Building And Loan Agency

What does 145’s beta value mean?

Hong Kong Building And Loan Agency’s beta of 0.34 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, 145 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Does 145’s size and industry impact the expected beta?

A market capitalisation of HKD HK$364.43M puts 145 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the mortgage industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap 145 but a low beta for the mortgage industry. It seems as though there is an inconsistency in risks portrayed by 145’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How 145’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 145’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 account for less than a third of the company’s overall assets, 145 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. This is consistent with is current beta value which also indicates low volatility.