In finance, what does "beta" measure?

Beta is a measure of a company's correlation to market fluctuations, specifically, it indicates how the price of a company's stock reacts to movements in the overall market. In finance, beta is used to quantify the volatility or systematic risk of a security in relation to the market as a whole. A beta greater than 1 suggests that the stock is more volatile than the overall market, while a beta less than 1 indicates that it is less volatile.

Understanding beta is crucial for investors as it helps them evaluate a stock's potential risk and return relative to market movements. This characteristic of beta makes it a vital component in the Capital Asset Pricing Model (CAPM), which helps in determining a theoretically appropriate required rate of return of an asset, taking into account its risk.

In this context, while other options refer to different financial metrics or concepts such as profitability, market return, or risk-free rate, they do not capture the essence of what beta represents in finance.