How Freehold Royalties Ltd. (TSE:FRU) Can Impact Your Portfolio Volatility

If you’re interested in Freehold Royalties Ltd. (TSE:FRU), then you might want to consider its beta (a measure of share price volatility) in order to understand how the stock could impact your portfolio. Volatility is considered to be a measure of risk in modern finance theory. Investors may think of volatility as falling into two main categories. First, we have company specific volatility, which is the price gyrations of an individual stock. Holding at least 8 stocks can reduce this kind of risk across a portfolio. The other type, which cannot be diversified away, is the volatility of the entire market. Every stock in the market is exposed to this volatility, which is linked to the fact that stocks prices are correlated in an efficient market.

Some stocks see their prices move in concert with the market. Others tend towards stronger, gentler or unrelated price movements. Beta is a widely used metric to measure a stock’s exposure to market risk (volatility). Before we go on, it’s worth noting that Warren Buffett pointed out in his 2014 letter to shareholders that ‘volatility is far from synonymous with risk.’ Having said that, beta can still be rather useful. The first thing to understand about beta is 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.

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See our latest analysis for Freehold Royalties

What FRU’s beta value tells investors

Given that it has a beta of 1.34, we can surmise that the Freehold Royalties share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, Freehold Royalties shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Beta is worth considering, but it’s also important to consider whether Freehold Royalties is growing earnings and revenue. You can take a look for yourself, below.

TSX:FRU Income Statement, May 23rd 2019
TSX:FRU Income Statement, May 23rd 2019

How does FRU’s size impact its beta?

Freehold Royalties is a small company, but not tiny and little known. It has a market capitalisation of CA$987m, which means it would be on the radar of intstitutional investors. It is quite common to see a small-cap stock with a beta greater than one. In part, that’s because relatively few investors can influence the price of a smaller company, compared to a large company.

What this means for you:

Since Freehold Royalties tends to moves up when the market is going up, and down when it’s going down, potential investors may wish to reflect on the overall market, when considering the stock. This article aims to educate investors about beta values, but it’s well worth looking at important company-specific fundamentals such as Freehold Royalties’s financial health and performance track record. I highly recommend you dive deeper by considering the following:

  1. Future Outlook: What are well-informed industry analysts predicting for FRU’s future growth? Take a look at our free research report of analyst consensus for FRU’s outlook.
  2. Past Track Record: Has FRU 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 FRU’s historicals for more clarity.
  3. Other Interesting Stocks: It’s worth checking to see how FRU measures up against other companies on valuation. You could start with this free list of prospective options.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.