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If you are a shareholder in SEEC Media Group Limited’s (SEHK:205), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 205 is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
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What does 205’s beta value mean?
SEEC Media Group has a beta of 1.57, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, 205 will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does 205’s size and industry impact its risk?
205, with its market capitalisation of HK$165.71M, is a small-cap stock, which generally have higher beta than similar companies of larger size. However, 205 operates in the media industry, which has commonly demonstrated muted reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap 205 but a low beta for the media industry. This is an interesting conclusion, since its industry suggests 205 should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How 205’s assets could affect its 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 205’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, 205 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 205 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 outcome contradicts 205’s current beta value which indicates an above-average volatility.