If you are looking to invest in Origin Energy Limited’s (ASX:ORG), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta 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 Origin Energy

What does ORG's beta value mean?

With a beta of 1.13, Origin Energy is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, ORG 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.

Does ORG's size and industry impact the expected beta?

With a market capitalisation of AUD $12.89B, ORG is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. However, ORG operates in the oil, gas and consumable fuels industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of ORG but a higher beta for the oil, gas and consumable fuels industry. This is an interesting conclusion, since its size suggests ORG should be less volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Is ORG's cost structure indicative of a high 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 examine ORG’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, ORG 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. However, this is the opposite to what ORG’s actual beta value suggests, which is higher stock volatility relative to the market.