What does 'beta' measure in finance?

Beta is a key concept in finance that quantifies the relationship between the volatility of a security and the overall market. It measures the sensitivity of a security's returns to changes in the market's returns. A beta of 1 indicates that the security's price tends to move with the market, while a beta greater than 1 suggests that the security is more volatile than the market, and a beta less than 1 indicates that it is less volatile.

Understanding beta is crucial for investors as it helps assess the risk associated with a specific investment relative to the market or a benchmark index. For instance, a portfolio with a high beta might be expected to provide higher returns but also greater risk in turbulent market conditions.

The other options do not accurately reflect the concept of beta. The return on investment pertains to the profitability of an asset, historical performance of bonds relates to past bond returns rather than market sensitivity, and liquidity of an asset deals with how easily it can be bought or sold without affecting its price, which is not related to beta’s measurement of volatility.