What does beta (β) measure in finance?

Beta (β) is a key measure in finance that quantifies the volatility of an asset in comparison to the overall market. It assesses how the price of a specific security or portfolio moves in relation to market movements. A beta greater than 1 indicates that the asset is more volatile than the market, meaning it tends to experience larger price swings; conversely, a beta less than 1 suggests that the asset is less volatile.

Understanding beta is crucial for investors as it helps them gauge the risk associated with an investment relative to the market's performance. If an investor is seeking to adjust the risk level of their portfolio, they can use beta to select securities that align with their risk tolerance.

The other options each pertain to different financial concepts: the overall return of an investment refers to total returns, including capital gains and income; total risk relates to a combination of systematic and unsystematic risks; and liquidity measures how quickly an asset can be bought or sold without affecting its price. These concepts are important in their own right but do not accurately describe what beta specifically measures.