If you are a shareholder in Golden Cariboo Resources Ltd’s (TSXV:GCC.H), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. GCC.H 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. Not every stock is exposed 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 Golden Cariboo Resources
What does GCC.H’s beta value mean?
Golden Cariboo Resources’s five-year beta of 2.55 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, GCC.H can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
Could GCC.H’s size and industry cause it to be more volatile?
GCC.H, with its market capitalisation of CAD CA$1.87M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, GCC.H’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This supports our interpretation of GCC.H’s beta value discussed above.
Can GCC.H’s asset-composition point to a higher 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 GCC.H’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, GCC.H doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect GCC.H 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. This outcome contradicts GCC.H’s current beta value which indicates an above-average volatility.