If you are looking to invest in Anglo Australian Resources NL’s (ASX:AAR), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

See our latest analysis for Anglo Australian Resources

What is AAR’s market risk?

Anglo Australian Resources has a beta of 1.78, 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, AAR 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 AAR’s size and industry impact its risk?

AAR, with its market capitalisation of AUD A$28.57M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, AAR also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with AAR’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Can AAR’s asset-composition point to a higher 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 test AAR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. AAR’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. Thus, we can expect AAR to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. Similarly, AAR’s beta value conveys the same message.