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If you are a shareholder in ALTERA Wealth Management Plc’s (BUSE:ALTERA), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. ALTERA 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. 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.
View our latest analysis for ALTERA Wealth Management
What is ALTERA’s market risk?
ALTERA Wealth Management’s beta of 0.18 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in ALTERA’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. ALTERA’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 ALTERA’s size and industry impact its risk?
A market capitalisation of FT14.39B puts ALTERA in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, ALTERA also operates in the capital markets industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the capital markets industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both ALTERA’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is ALTERA’s cost structure indicative of a high 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 ALTERA’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, ALTERA doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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.