What does 'beta' measure in finance?

Beta is a financial metric that quantifies the volatility or systematic risk of an asset in comparison to the broader market, typically represented by a market index such as the S&P 500. A beta value of 1 indicates that the asset's price moves with the market; a beta greater than 1 signifies that the asset is more volatile than the market, while a beta less than 1 indicates that it is less volatile.

This measurement is crucial for investors as it helps them understand how much an individual asset's returns are expected to fluctuate in relation to market movements. By assessing beta, investors can make informed decisions about the risk and potential return profile of specific investments within the context of their overall portfolio. Additionally, beta is instrumental in portfolio management and determining the expected return through models like the Capital Asset Pricing Model (CAPM), where it is used to calculate the required return on an asset based on its risk in relation to the market.