What does beta measure in finance?

Beta measures the sensitivity of an asset’s returns in relation to the overall market returns. In finance, it is a key metric used in the Capital Asset Pricing Model (CAPM) to assess the risk associated with a particular investment compared to a benchmark, usually the broader market. A beta of greater than 1 indicates that the asset is expected to be more volatile than the market, while a beta of less than 1 suggests that the asset is less volatile.

This concept helps investors understand how much an asset's price may fluctuate in response to market movements. For instance, if an asset has a beta of 1.5, it is anticipated to move 1.5 times more than the market; if the market goes up by 10%, the asset would be expected to go up by 15%.

The other options relate to different financial metrics or concepts. The overall market trend refers to the general direction of the market but does not capture risk sensitivity. The risk-free rate of return is the return on an investment with zero risk, often used as a baseline for comparing investment performance. Volatility of an asset itself refers to its price fluctuations over time but does not specifically measure its relationship to market movements. Thus, the accurate definition of beta aligns