If you own shares in China Harmony New Energy Auto Holding Limited (HKG:3836) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The second type is the broader market volatility, which you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks on the market.
Some stocks are more sensitive to general market forces than others. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that 'Volatility is far from synonymous with risk', beta is still a useful factor to consider. To make good use of it you must first know that the beta of the overall market is 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 we can learn from 3836's beta value
Looking at the last five years, China Harmony New Energy Auto Holding has a beta of 1.84. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If this beta value holds true in the future, China Harmony New Energy Auto Holding shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see China Harmony New Energy Auto Holding's revenue and earnings in the image below.
Could 3836's size cause it to be more volatile?
With a market capitalisation of HK$4.6b, China Harmony New Energy Auto Holding is a small cap stock. However, it is big enough to catch the attention of professional investors. It's not particularly surprising that it has a higher beta than the overall market. That's because it takes less money to influence the share price of a smaller company, than a bigger company.
What this means for you:
Beta only tells us that the China Harmony New Energy Auto Holding share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. This article aims to educate investors about beta values, but it's well worth looking at important company-specific fundamentals such as China Harmony New Energy Auto Holding’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for 3836’s future growth? Take a look at our free research report of analyst consensus for 3836’s outlook.
- Past Track Record: Has 3836 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 3836's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how 3836 measures up against other companies on valuation. You could start with this free list of prospective options.
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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.