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If you’re interested in Cornerstone Financial Holdings Limited (HKG:8112), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks on the market.
Some stocks are more sensitive to general market forces than others. 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.
Check out our latest analysis for Cornerstone Financial Holdings
What 8112’s beta value tells investors
Given that it has a beta of 1.25, we can surmise that the Cornerstone Financial Holdings share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Cornerstone Financial Holdings shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. 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 Cornerstone Financial Holdings fares in that regard, below.
Does 8112’s size influence the expected beta?
Cornerstone Financial Holdings is a noticeably small company, with a market capitalisation of HK$62m. Most companies this size are not always actively traded. Relatively few investors can influence the price of a smaller company, compared to a large company. This could explain the high beta value, in this case.
What this means for you:
Beta only tells us that the Cornerstone Financial Holdings share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there’s plenty more to learn. In order to fully understand whether 8112 is a good investment for you, we also need to consider important company-specific fundamentals such as Cornerstone Financial Holdings’s financial health and performance track record. I highly recommend you dive deeper by considering the following: