What does "beta" measure in finance?

Beta measures the volatility of a stock relative to the overall market. It is a statistical measure that indicates how much a stock's price is expected to move in relation to market movements. A beta of 1 means the stock tends to move with the market; a beta less than 1 indicates that the stock is less volatile than the market, while a beta greater than 1 suggests that the stock is more volatile. This characteristic makes beta a crucial component in portfolio management and the Capital Asset Pricing Model (CAPM), as it helps investors understand the risk associated with holding a specific stock compared to the market.

Understanding beta is essential for investors seeking to gauge risk in their investments, as it provides insight into how much a stock's price may fluctuate based on market conditions. For example, during a market downturn, a high-beta stock is likely to experience larger swings in price compared to the overall market.