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If you own shares in King Stone Energy Group Limited (HKG:663) then it’s worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. 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 see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that ‘Volatility is far from synonymous with risk’, beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. Any stock with a beta of greater than one is considered more volatile than the market, while those with a beta below one are either less volatile or poorly correlated with the market.
Check out our latest analysis for King Stone Energy Group
What 663’s beta value tells investors
Looking at the last five years, King Stone Energy Group has a beta of 1.38. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If the past is any guide, we would expect that King Stone Energy Group shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see King Stone Energy Group’s revenue and earnings in the image below.
Does 663’s size influence the expected beta?
King Stone Energy Group is a noticeably small company, with a market capitalisation of HK$1.02b. Most companies this size are not always actively traded. It takes less money to influence the share price of a very small company. This may explain the excess volatility implied by this beta value.
What this means for you:
Since King Stone Energy Group 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 663 is a good investment for you, we also need to consider important company-specific fundamentals such as King Stone Energy Group’s financial health and performance track record. I urge you to continue your research by taking a look at the following: