If you are a shareholder in Arco Resources Corp’s (TSXV:ARR.H), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. ARR.H 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. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

View our latest analysis for Arco Resources

What is ARR.H’s market risk?

Arco Resources's beta of 0.81 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, ARR.H appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Could ARR.H's size and industry cause it to be more volatile?

With a market cap of CAD $516.30K, ARR.H falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, ARR.H also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap ARR.H but a low beta for the metals and mining industry. It seems as though there is an inconsistency in risks portrayed by ARR.H’s size and industry relative to its actual beta value.

How ARR.H's assets could affect its beta

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine ARR.H’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, ARR.H doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, ARR.H’s beta value conveys the same message.

What this means for you:

Are you a shareholder? ARR.H may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as ARR.H is valuable to lower your risk of market exposure, in particular, during times of economic decline.

Are you a potential investor? Before you buy ARR.H, you should look at the stock in conjunction with their current portfolio holdings. ARR.H may be a great cushion during times of economic downturns due to its low beta, but before leaping into the investment, I recommend taking into account its fundamentals as well.

Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Arco Resources for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Arco Resources anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.