For Reliance Capital Limited’s (NSEI:RELCAPITAL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures RELCAPITAL’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, 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.

View our latest analysis for Reliance Capital

What is RELCAPITAL’s market risk?

With a beta of 1.15, Reliance Capital is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, RELCAPITAL can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

Could RELCAPITAL’s size and industry cause it to be more volatile?

A market capitalisation of ₹108.61B puts RELCAPITAL in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, RELCAPITAL’s industry, diversified financial, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the diversified financial industry, relative to those more well-established firms in a more defensive industry. This supports our interpretation of RELCAPITAL’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.

Can RELCAPITAL’s asset-composition point to a higher 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 test RELCAPITAL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, RELCAPITAL doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect RELCAPITAL 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. However, this is the opposite to what RELCAPITAL’s actual beta value suggests, which is higher stock volatility relative to the market.