In finance, what does the term ‘beta’ measure?

The term ‘beta’ in finance specifically measures the sensitivity of a stock's return to market movements. It quantifies how much a stock's price is expected to change in relation to changes in the overall market's price. A beta greater than 1 indicates that the stock is more volatile than the market, suggesting that if the market goes up or down, the stock is likely to move in a similar direction but at a greater magnitude. Conversely, a beta of less than 1 suggests that the stock is less volatile than the market.

Understanding beta is crucial for investors aiming to assess the risk associated with a particular stock relative to the market. This measure helps in constructing a diversified portfolio by allowing investors to manage their exposure to systematic market risk. In essence, beta serves as a key component in the Capital Asset Pricing Model (CAPM), which is used to determine an investment's expected return based on its risk in relation to the market.

In this context, it is important to note that the other options do not accurately reflect the definition of beta. The risk-free return pertains to the return on investments that are considered free of any risks, while the correlation between stock prices and commodity prices does not specifically relate to beta. Additionally, while overall market volatility is