What does "beta" measure in finance?

In finance, "beta" is a measure of an investment's volatility or risk in relation to the overall market. Specifically, it indicates how much an asset's price is expected to move relative to movements in a market index, such as the S&P 500. A beta of 1 suggests that the asset's price tends to move with the market; a beta greater than 1 indicates higher volatility, meaning that the asset is expected to experience larger price movements compared to the market. Conversely, a beta less than 1 indicates that the asset tends to be less volatile than the market.

By understanding beta, investors can gauge the risk associated with an investment relative to broader market dynamics, which can be a key component in portfolio management and investment decision-making. This ability to assess relative risk helps in making informed choices about asset allocation and overall investment strategy.