For Argo Investments Limited’s (ASX:ARG) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 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.

See our latest analysis for ARG

An interpretation of ARG’s beta

Argo Investments’s beta of 0.41 indicates that the stock value will be less variable compared to the whole stock 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. ARG’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.

Does ARG’s size and industry impact the expected beta?

With a market capitalisation of AUD A$5.53B, ARG is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. But, ARG’s industry, capital markets, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a low beta for the large-cap nature of ARG but a higher beta for the capital markets industry. It seems as though there is an inconsistency in risks from ARG’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is ARG’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 examine ARG’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 an insignificant portion of total assets, ARG doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect ARG 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, ARG’s beta value conveys the same message.