In the context of the Capital Asset Pricing Model, what does "Beta" measure?

In the context of the Capital Asset Pricing Model (CAPM), "Beta" is a crucial measure that gauges the volatility of a security compared to the overall market. It quantifies how much the security's price tends to move in relation to market movements. A Beta greater than 1 indicates that the security is more volatile than the market; if the market moves up or down, the security is expected to move more significantly in the same direction. Conversely, a Beta of less than 1 suggests that the security is less volatile than the market.

Understanding Beta is essential for investors as it helps them assess risk and potential return. It plays a critical role in portfolio management and investing strategies, as it assists in predicting how a specific security might perform in various market conditions. This measurement does not focus on total investment risk, which encompasses both systematic and unsystematic risks, but rather hones in specifically on systematic risk associated with market movements.