If you own shares in Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. Modern finance theory considers volatility to be a measure of risk, and there are two main types of price volatility. The first type is company specific volatility. Investors use diversification across uncorrelated stocks to reduce this kind of price volatility across the portfolio. The second sort is caused by the natural volatility of markets, overall. For example, certain macroeconomic events will impact (virtually) all stocks on the 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.
What ARNA's beta value tells investors
Looking at the last five years, Arena Pharmaceuticals has a beta of 1.50. The fact that this is well above 1 indicates that its share price movements have shown sensitivity to overall market volatility. If the past is any guide, we would expect that Arena Pharmaceuticals shares will rise quicker than the markets in times of optimism, but fall faster in times of pessimism. Share price volatility is well worth considering, but most long term investors consider the history of revenue and earnings growth to be more important. Take a look at how Arena Pharmaceuticals fares in that regard, below.
Does ARNA's size influence the expected beta?
Arena Pharmaceuticals is a fairly large company. It has a market capitalisation of US$2.3b, which means it is probably on the radar of most investors. It takes deep pocketed investors to influence the share price of a large company, so it's a little unusual to see companies this size with high beta values. It may be that that this company is more heavily impacted by broader economic factors than most.
What this means for you:
Since Arena Pharmaceuticals 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 Arena Pharmaceuticals’s financial health and performance track record. I urge you to continue your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ARNA’s future growth? Take a look at our free research report of analyst consensus for ARNA’s outlook.
- Past Track Record: Has ARNA 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 ARNA's historicals for more clarity.
- Other Interesting Stocks: It's worth checking to see how ARNA measures up against other companies on valuation. You could start with this free list of prospective options.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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