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If you are a shareholder in Gaumont SA’s (ENXTPA:GAM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. GAM 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. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta 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.
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What is GAM’s market risk?
Gaumont’s beta of 0.24 indicates that the company is less volatile relative to the diversified market portfolio. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, GAM appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could GAM’s size and industry cause it to be more volatile?
With a market cap of €373.73M, GAM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. However, GAM 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 GAM but a low beta for the media industry. This is an interesting conclusion, since its size suggests GAM should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can GAM’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 GAM’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since GAM’s fixed assets are only 7.26% 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 GAM 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. Similarly, GAM’s beta value conveys the same message.