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My risk model shows a Beta of 2 for the stock APTIV (maker of car components). The model looks at the past 3 years with no decay.

Total vol is high but specific vol is very low. Typically when this happens it is because of the leverage which magnifies returns. However in this instance the company does not seem to have much leverage.

What can explain a high sensitivity to the mark and low idiosyncratic risk for a company which is not levered more than others?

Thanks

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    $\begingroup$ The car industry is highly sensitive to the overall economy. $\endgroup$
    – nbbo2
    Apr 19, 2021 at 17:42
  • $\begingroup$ Further to @noob2's point, car components are ECONOMICALLY levered to the autos biz, that is economically levered to the economy ;-) Beyond that, the last 3 years is an "interesting" sample period in which non-Covid idiosyncratic signal easily gets "drowned out" in the Covid noise. Track the market with high correlation and beta in the high-vol times, it will be hard for the idiosyncratic residuals in lower-vol times to compete. Do an ANOVA, and split it year-by-year :-) $\endgroup$
    – demully
    Jan 15 at 0:35
  • $\begingroup$ @demully can you clarify what you mean re ANOVA? Is your intuition that in COVID times the specific risk of stocks is decreasing and most of the vol is explained by the market? Or did I get this wrong? What do you expect the ANOVA would reveal? Thanks. $\endgroup$
    – tweedi
    Feb 20 at 11:52

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One of the explanations could be a business model with low diversification and a significant exposure to key suppliers, vendors, markets etc, typically manifested in highly volatile net revenue or EBITDA numbers. The fact that an operating entity is underlevered may signal that the management is not comfortable with taking on debt, or the lenders are not willing to underwrite it.

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