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How Does NMI Holdings, Inc. (NASDAQ:NMIH) Affect Your Portfolio Volatility?

Simply Wall St

If you own shares in NMI Holdings, Inc. (NASDAQ:NMIH) then it's worth thinking about how it contributes to the volatility of your portfolio, overall. In finance, Beta is a measure of volatility. 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 are more sensitive to general market forces than others. Some investors use beta as a measure of how much a certain stock is impacted by market risk (volatility). While we should keep in mind that Warren Buffett has cautioned that 'Volatility is far from synonymous with risk', beta is still a useful factor to consider. To make good use of it you must first know 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.

View our latest analysis for NMI Holdings

What we can learn from NMIH's beta value

Given that it has a beta of 1.24, we can surmise that the NMI Holdings share price has been fairly sensitive to market volatility (over the last 5 years). If this beta value holds true in the future, NMI Holdings shares are likely to rise more than the market when the market is going up, but fall faster when the market is going down. Many would argue that beta is useful in position sizing, but fundamental metrics such as revenue and earnings are more important overall. You can see NMI Holdings's revenue and earnings in the image below.

NasdaqGM:NMIH Income Statement, November 12th 2019

How does NMIH's size impact its beta?

NMI Holdings is a fairly large company. It has a market capitalisation of US$2.2b, 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:

Beta only tells us that the NMI Holdings share price is sensitive to broader market movements. This could indicate that it is a high growth company, or is heavily influenced by sentiment because it is speculative. Alternatively, it could have operating leverage in its business model. Ultimately, beta is an interesting metric, but there's plenty more to learn. In order to fully understand whether NMIH is a good investment for you, we also need to consider important company-specific fundamentals such as NMI Holdings’s financial health and performance track record. I urge you to continue your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for NMIH’s future growth? Take a look at our free research report of analyst consensus for NMIH’s outlook.
  2. Past Track Record: Has NMIH 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 NMIH's historicals for more clarity.
  3. Other Interesting Stocks: It's worth checking to see how NMIH 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.