If you are a shareholder in Tomizone Limited’s (ASX:TOM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as TOM. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.

Not all stocks are expose to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

See our latest analysis for TOM

What is TOM’s market risk?

Tomizone’s beta of 0.23 indicates that the company is less volatile relative to the diversified market portfolio.This means that the change in TOM'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.TOM’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

How does TOM's size and industry impact its risk?

TOM, with its market capitalisation of AUD $4.91M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, TOM also operates in the software and services industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap TOM but a low beta for the software and services industry. It seems as though there is an inconsistency in risks portrayed by TOM’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How TOM's assets could affect its 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 TOM’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint.Since TOM’s fixed assets are only 13.14% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business.Thus, we can expect TOM 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. This is consistent with is current beta value which also indicates low volatility.