Five high-risk, high-reward shares

Indeed, by the end of this week the Bank of England may already have announced its latest round of quantitative easing, which is expected to be £50bn-plus of new money. Given the limited impact of past rounds of easing on the money supply, inflation and general economic health (unless you count the health of bank balance sheets) more radical action is also being considered, with talk of the Bank of England providing cheap financing to banks on the basis that it is exclusively passed on to smaller businesses and households.

Pervious QE-based rallies have seen small caps outperform large-caps, and our sector focus last week (QE's small-cap winners) looked at the hottest QE prospects among the minnows. Our screen, however, is injecting a small element of safety into the risky proposition of hunting for hot QE stocks. We're looking for relatively large companies with reasonably sound financials, which are nevertheless extremely cheap and have demonstrated a very extreme sensitivity to stock market trends in the past. This is our criteria:

■ Risk: We've used the shares' one-year and five-year betas, which measure price volatility compared with that of the index, as our key measure of risk. To past our test, shares have to have betas of 1.5 or more on both measures.

■ Cheapness: As a sign that sentiment is low towards the shares we've looked at both the popular price/earnings ratio (PE) and dividend yield (DY) valuation measures. We have screened for stocks that are either:

i)Among the 25 per cent of lowest priced stocks based on both historic and forecast PE; or

ii)Among the 25 per cent of highest yielding stocks.

■ Safety: While high-beta shares with low valuations are going to be inherently extremely risky, we've also looked for signs that they are not utter basket cases. These are:

i)Net debt must be three times cash profits or less

ii)Interest costs must be at least twice covered by last year’s earnings

iii)The current ratio (current assets divided by current liabilities) must be over 1

iv)Market cap must be £250m or more

We've found five high-risk stocks that could be major beneficiaries of a bounce, all of which come from just two very economically sensitive sectors - industrial metals and financials. We've given each a brief write-up below to give a taste of just how speculative each situation is.

Enter the danger zone

Evraz*

Steelmaker Evraz faces the prospect of falling prices at the moment, while sentiment towards the shares suffers due to the company's location: Russia. That said, some of the risks associated with price weakness are mitigated by the fact that the group mines its own iron ore. What's more, QE has had a positive impact on commodity prices in the past. And Evraz has the allure in the long term of being a play on Russian infrastructure development. It is the only stock that qualified as cheap in our screen both on the basis of its low PE valuation and its high dividend yield. Last IC view: Hold, 362p, 30 Mar 2012.

*Evraz hasn't been around long enough to have a one or five year beta, however, we have taken a raw beta figure from Bloomberg, and based on this it qualifies for our screen.

International Personal Finance**

Credit markets have remained tight since the credit crunch and recent ructions in the eurozone have added to lenders' headaches. Against this backdrop, International Personal Finance, which provides short-term high-margin loans in several international markets, has put in a very solid performance. While recent results have been hit by several one-off factors, the underlying performance of the group looks good and a recovery in its Mexican operation is encouraging. Perhaps just as important as what has happened in the business is what has not happened - namely, there has been no marked increase in loans going bad as a result of the economic slowdown. While sentiment is fragile, long-term growth prospects actually look rather good. Last IC view: Buy, 362p, 30 Mar 2012

Vedanta

Prices have been softening across the range of base metals that Vedanta produces at the same time as costs have been increasing. So even though the acquisitions of Cairn India and Zinc International boosted the group's most recent results, sentiment is still decidedly negative. However, if governments let rip with stimulus efforts then Vedanta's selling prices are likely to benefit as they have under such circumstances in the past and there can be no doubting that its shares look very cheap under such a scenario. Last IC view: Hold, 991p, 18 May 2012

Kazakhmys

Downward price pressures, upward cost pressures and stagnant production hardly make Kazakh copper producer Kazakhmys an enticing prospect for investors at the moment. The company's output has been hit by falling ore grades and the trend is expected to continue, forcing the miner to increase volumes, at increased cost, in order to keep output steady. However, there are plans for growth, with production from a new mine expected in 2015. No doubt a tailwind for stimulus measure would be very welcome. Last IC view: Hold, 951p, 28 Mar 2012

Barclays**

Following the Libor fixing scandal, Barclays is enduring a spell as the bad boy of British banking. However, other rogues are expected to be outed imminently and this could dilute the fears about litigation that have hit the company's share price recently. What's more, the disgrace and consternation currently being voiced could provide a useful impetus for the group to slim down its BarCap operations, which contribute significantly to overall costs - a move that many shareholders would welcome. So while there are many reasons to be wary of Barclays, the shares look as though they could be at a low ebb. What's more, big UK banks will be a prime beneficiary of any cheap funding offered by the Bank of England. Last IC view: Sell, 234p, 13 Feb 2012

**Due to the nature of financials' balance sheets we've excluded them from the associated tests