For American International Group Inc’s (NYSE:AIG) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of AIG. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not every stock is exposed to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value 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 American International Group
An interpretation of AIG’s beta
American International Group’s five-year beta of 1.14 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. According to this value of beta, AIG may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.
Could AIG’s size and industry cause it to be more volatile?
AIG has a market capitalization of USD $54.87B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. Conversely, the company operates in the insurance industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors can expect a low beta associated with the size of AIG, but a higher beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from AIG’s size and industry.
Is AIG’s cost structure indicative of a high 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 AIG’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, AIG seems to have a smaller dependency on fixed costs to generate revenue. 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. However, this is the opposite to what AIG’s actual beta value suggests, which is higher stock volatility relative to the market.
What this means for you:
Are you a shareholder? You could benefit from higher returns during times of economic growth. However, in times of a downturn, it may be safe to look at a more defensive stock which can cushion the impact of lower demand. It’s always wise to take into account your portfolio sensitivity to the market before you invest in AIG, as well as where we are in the current economic cycle.
Are you a potential investor? Before you buy AIG, you should take into account how their portfolio currently moves with the market, in addition to the current economic environment. AIG may be a valuable addition to portfolios during times of economic growth, and it may be work looking further into fundamental factors such as current valuation and financial health.
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 American International Group 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 American International Group anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.