How Does Investing In Equitable Group Inc (TSE:EQB) Impact Your Portfolio?

If you are looking to invest in Equitable Group Inc’s (TSX:EQB), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. Broadly speaking, there are two types of risk you should consider when investing in stocks such as EQB. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.

Different characteristics of a stock expose it to various levels of market risk. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

What is EQB’s market risk?

With a five-year beta of 0.94, Equitable Group appears to be a less volatile company compared to the rest of the market. This means that the change in EQB's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. EQB’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

Does EQB's size and industry impact the expected beta?

EQB, with its market capitalisation of CA$1.18B, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the mortgage industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap EQB but a low beta for the mortgage industry. It seems as though there is an inconsistency in risks portrayed by EQB’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How EQB's assets could affect its 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 EQB’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up an insignificant portion of total assets, EQB 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, EQB’s beta value conveys the same message.

What this means for you:

You could benefit from lower risk during times of economic decline by holding onto EQB. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether XYZ is a good investment for you, we also need to consider important company-specific fundamentals such as Equitable Group’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for EQB’s future growth? Take a look at our free research report of analyst consensus for EQB’s outlook.

2. Past Track Record: Has EQB 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 EQB's historicals for more clarity.

3. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.