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For QBE Insurance Group Limited’s (ASX:QBE) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. QBE 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. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta value 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.
View our latest analysis for QBE Insurance Group
What is QBE’s market risk?
With a five-year beta of 0.74, QBE Insurance Group appears to be a less volatile company compared to the rest of the 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, QBE appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could QBE’s size and industry cause it to be more volatile?
A market capitalisation of AU$13.08B puts QBE in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. But, QBE’s industry, insurance, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors can expect a low beta associated with the size of QBE, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from QBE’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How QBE’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 QBE’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, QBE doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect QBE to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, QBE’s beta value conveys the same message.