What does the term "beta" represent in finance?

The term "beta" in finance specifically reflects the sensitivity of an asset's returns in relation to the returns of a market benchmark, typically a stock market index. A beta of 1 indicates that the asset's price moves with the market; a beta greater than 1 means the asset is more volatile than the market, while a beta less than 1 suggests it is less volatile. This metric is vital for investors, as it helps in assessing the riskiness of an investment compared to the overall market. Investors utilize beta to gauge how their investments might behave in varying market conditions, which is instrumental in portfolio management and risk assessment. This measure of relative risk is pivotal in the Capital Asset Pricing Model (CAPM), used to estimate the expected return of an asset based on its risk compared to the market.