If you own shares in Red Emperor Resources NL (ASX:RMP) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.
Some stocks see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Beta can be a useful tool to understand how much a stock is influenced by market risk (volatility). However, Warren Buffett said 'volatility is far from synonymous with risk' in his 2014 letter to investors. So, while useful, beta is not the only metric to consider. To use beta as an investor, you must first understand that the overall market has a beta of one. A stock with a beta greater than one is more sensitive to broader market movements than a stock with a beta of less than one.
What does RMP's beta value mean to investors?
Looking at the last five years, Red Emperor Resources has a beta of 1.20. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If the past is any guide, we would expect that Red Emperor Resources shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Beta is worth considering, but it's also important to consider whether Red Emperor Resources is growing earnings and revenue. You can take a look for yourself, below.
Could RMP's size cause it to be more volatile?
With a market capitalisation of AU$5.3m, Red Emperor Resources is a very small company by global standards. It is quite likely to be unknown to most investors. It has a relatively high beta, suggesting it is fairly actively traded for a company of its size. Because it takes less capital to move the share price of a small company like this, when a stock this size is actively traded it is quite often more sensitive to market volatility than similar large companies.
What this means for you:
Since Red Emperor Resources tends to moves up when the market is going up, and down when it's going down, potential investors may wish to reflect on the overall market, when considering the stock. In order to fully understand whether RMP is a good investment for you, we also need to consider important company-specific fundamentals such as Red Emperor Resources’s financial health and performance track record. I highly recommend you dive deeper by considering the following:
- Past Track Record: Has RMP been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of RMP's historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.