If you own shares in Banca Finnat Euramerica S.p.A. (BIT:BFE) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first category is company specific volatility. This can be dealt with by limiting your exposure to any particular stock. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the market.
Some stocks see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that 'Volatility is far from synonymous with risk', beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
See our latest analysis for Banca Finnat Euramerica
What we can learn from BFE's beta value
Zooming in on Banca Finnat Euramerica, we see it has a five year beta of 0.85. This is below 1, so historically its share price has been rather independent from the market. This suggests that including it in your portfolio will reduce volatility arising from broader market movements, assuming your portfolio's weighted average beta is higher than 0.85. Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how Banca Finnat Euramerica fares in that regard, below.
How does BFE's size impact its beta?
Banca Finnat Euramerica is a rather small company. It has a market capitalisation of €94m, which means it is probably under the radar of most investors. Companies with market capitalisations around this size often show poor correlation with the broader market because market volatility is overshadowed by company specific events, or other factors. It's worth checking to see how often shares are traded, because very small companies with very low beta values are often only thinly traded.
What this means for you:
One potential advantage of owning low beta stocks like Banca Finnat Euramerica is that your overall portfolio won't be too sensitive to overall market movements. However, this can be a blessing or a curse, depending on what's happening in the broader market. In order to fully understand whether BFE is a good investment for you, we also need to consider important company-specific fundamentals such as Banca Finnat Euramerica’s financial health and performance track record. I highly recommend you dive deeper by considering the following: