What does beta measure in finance?

Beta is a key metric in finance, specifically in the context of the Capital Asset Pricing Model (CAPM). It measures the sensitivity of an asset's returns to the movements of the overall market. When investors evaluate an asset's risk, they want to understand how much that asset's price tends to move in relation to the market as a whole.

If an asset has a beta greater than one, it indicates that the asset is more volatile than the market, meaning it will generally experience larger price swings in either direction compared to the market. Conversely, a beta less than one implies that the asset is less volatile, experiencing smaller price movements than the market. A beta of one indicates that the asset's price tends to move with the market. This understanding of beta is crucial for investors as it helps them assess the risk and expected return of an asset in the context of their entire investment portfolio.