What does the beta coefficient measure?

The beta coefficient is a vital measure in finance that quantifies the relationship between the return of a particular stock and the return of the overall market. Specifically, it indicates the level of volatility or risk a stock has in relation to market movements. A beta of 1 implies that the stock's price tends to move with the market. A beta greater than 1 indicates that the stock is more volatile than the market, meaning it would be expected to rise more than the market in bullish scenarios and fall more in bear markets. Conversely, a beta less than 1 suggests the stock is less volatile than the market.

This concept is crucial for investors seeking to understand the systematic risk associated with their investments compared to the overall market risk. By focusing on the relative sensitivity of a stock's return, investors can make informed decisions about how much risk they are willing to take in relation to market fluctuations. This understanding is integral to portfolio management and asset allocation strategies.