What does "beta" measure in finance?

Beta is a key concept in finance that quantifies the sensitivity of a stock’s price to the overall movements of the market. It measures a stock's volatility relative to the market, providing investors with a sense of how much risk is associated with a particular investment compared to the market as a whole. A beta of 1 indicates that the stock's price tends to move in line with the market; a beta greater than 1 implies greater volatility than the market, while a beta less than 1 suggests lower volatility.

Understanding beta is crucial for risk assessment and portfolio management because it helps investors gauge how changes in the overall market might impact the returns from a specific asset. This concept is especially important for those who follow the Capital Asset Pricing Model (CAPM), which uses beta to determine the expected return on an investment based on its market risk.

The other options involve different financial concepts that do not relate directly to the measure of volatility in relation to the market. While they are vital in their own contexts, they do not define what beta represents in finance.