Risk tolerance is an important concept
Beta can help investors choose the right stocks
The highest and lowest Beta stocks on the ASX
There are two types of investors out there – one who is risk averse and the other who is risk tolerant.
Risk averse investors tend to focus on preservation of capital, preferring to invest in stocks with lower volatility. This type of investor may even emphasise the importance of diversification in their portfolio.
Risk tolerant investors, on the other hand, are comfortable with taking on higher levels of risk in pursuit of potentially higher returns. They accept greater short term volatility and fluctuations in return for longer term gains.
There is no right or wrong here, everyone is unique, and the type of investor you are just depends on your personality and the goals you’ve set for yourself.
But there’s an old Wall Street adage that says: “You can eat well or you can sleep well.”
The meaning is self-explanatory and there’s no need to elaborate, but the key point is that you need to determine what your own risk tolerance is.
So how do you do that?
Well, the questions to ask yourself are: what are your investment objectives, when do you need the money, and how would you react if you lost a big chunk of money, even on paper?
The last one is crucial, because determining your risk tolerance also involves thinking about hypothetical and worst case scenarios.
For instance, how would you feel if you lost 20% or 30% of your portfolio value, and how would that impact your family?
Introducing Beta
There’s a trading tool used by market experts to assist in choosing the right stocks that fit with investors’ risk tolerance levels.
The tool is called Beta – which is essentially a measure of a stock’s volatility in relation to the overall market.
The formula is much too convoluted to publish here, so it’s suffice to explain that if:
Beta = 1: The stock moves in perfect correlation with the market.
Beta higher than 1: The stock is more volatile than the market. When beta is 2, for example, it indicates the stock moves twice more than the market, in either direction.
Beta less than 1 : The stock is less volatile than the market. A beta of 0.6, for instance, suggests the stock moves only 60% as much as the market, in either direction.
So how can investors interpret this knowledge and use it in their investing decisions?
Well, for the risk averse investor, choosing stocks with Beta less than or equal to 1 might be the most suitable option.
For risk tolerant investors, choosing stocks with Beta higher than 1 might better reflect their investment philosophy.
Where can I get Beta numbers for each stock?
Your online broker should be able to provide you with Beta data on each stock.
On Commsec for example, traders can sort stocks by their Beta values.
Here’s the latest data from Commsec, which sorts stocks by their highest and lowest Beta values.
Stocks with highest Beta values (most volatile)
Note: this list is not a comprehensive list
Code Name Beta > 1 BP8 BPH Global 2.00 CT1 Constellation Tech 2.00 AJL AJ Lucas 2.00 AMP AMP Ltd 2.00 MGL Magontec 2.00 A1N ARN Media 2.00 DOU Douugh 2.00 CDD Cardno 2.00 CGF Challenger 2.00 CGO CPT Global 2.00 IGN Ignite 2.00 AGD Austral Gold 2.00 AJX Alexium 2.00 EWC Energy World 2.00 TOY ToysRUs Anz 2.00
Stocks with highest Beta values (least volatile)
Note: this list is not a comprehensive list
Code Name Beta < 1 VPR Volt Power 0.5 BXN Bioxyne 0.5 DEM De.mem 0.5 FHE Frontier Energy 0.5 BIO Biome 0.5 LGI Lgi 0.5 CCE Carnegie Clean Energy 0.52 TPC TPC Consolidated 0.53 CCO Calmer Co 0.54 SKN Skin Elements 0.54 D2O Duxton Water 0.54 CHL Camplify 0.55 TUA Tuas 0.56 AN1 Australian Nutrition & Sports 0.56 S66 Star Combo Pharma 0.57
Stockhead has not provided any financial product advice in this article.
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