In investment analysis, what does beta measure?

• A. It measures a company's debt to equity ratio
• B. It measures liquidity risk
• C. It measures sensitivity to market moves
• D. It measures management quality

Answer: (C)

Beta measures how much a security’s returns move in relation to the overall market. It captures systematic (market) risk—the portion of risk that cannot be eliminated by diversification. A beta around 1 means the stock tends to move with the market; a beta above 1 indicates higher volatility relative to the market, and a beta below 1 indicates lower volatility. This concept is central in the CAPM framework, where the expected return of a security is tied to its beta: expected return equals the risk-free rate plus beta times the market risk premium. Beta is estimated by regressing the security’s historical returns against market returns, so it reflects how responsive the asset has been to market swings in the chosen period. It does not measure leverage (debt to equity), liquidity risk, or management quality—those are separate dimensions of risk or qualitative factors not captured by beta.