What does beta measure in the Capital Asset Pricing Model (CAPM)?

In the Capital Asset Pricing Model (CAPM), beta is a key measure that quantifies a stock's volatility relative to the broader market. It indicates how much the stock's price is expected to move in relation to movements in the market as a whole.

A beta of 1 implies that the stock's price will move in tandem with the market. If the beta is greater than 1, the stock is more volatile than the market, meaning it tends to experience larger price fluctuations in response to market movements. Conversely, a beta of less than 1 indicates that the stock is less volatile than the market, suggesting that it will often move less dramatically when the market changes. This relationship is essential for investors as it helps them assess the risk associated with the stock compared to the general market risk.

Understanding beta allows investors to make informed decisions regarding the potential risks and returns associated with their investments, aligning their portfolios with their risk tolerance and market expectations.