If you are a shareholder in Livestock Improvement Corporation Limited’s (NZSE:LIC), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as LIC. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.

Not all stocks are expose to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value 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.

Check out our latest analysis for Livestock Improvement

What is LIC’s market risk?

With a five-year beta of 0.18, Livestock Improvement 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. LIC's beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

How does LIC's size and industry impact its risk?

With a market cap of NZD $70.87M, LIC falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, LIC operates in the food, beverage and tobacco industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap LIC but a low beta for the food, beverage and tobacco industry. This is an interesting conclusion, since its size suggests LIC should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How LIC'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 LIC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, LIC appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of LIC indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what LIC’s actual beta value suggests, which is lower stock volatility relative to the market.