The beta coefficient measures the volatility of the return on a financial instrument in relation to the market as a whole. A security that responds strongly to changes in the market is assigned a high beta, while a security that has a minimal response to changes in the market is assigned a low beta. For example, a security with a beta of 1.1 is 10% more volatile than the general market. Securities with high beta values are considered to have a strong potential return, but also a higher risk of loss. Securities with a low beta are considered to be safer, but also have a low probability of experiencing high returns. If a security has a beta of 1, its price should move with the market.
The beta coefficient is used in the capital asset pricing model to indicate the market risk of a security.