What does the beta of a stock measure

Subject : Business

Question: In finance, what does “the beta” of a stock measure?

A) The total return on investment

B) The stock’s volatility or risk compared to the overall market

C) The dividend yield

D) The company’s earnings per share

Expert Verified Solution:

The correct answer is:

B) The stock’s volatility or risk compared to the overall market.

Explanation:

In finance, “beta” is a measure of a stock’s volatility or risk about the overall market. Specifically, it indicates how much a stock’s price is expected to move relative to movements in a market index (like the S&P 500).

A beta of 1 means the stock is expected to move in line with the market.

A beta greater than 1 indicates that the stock is more volatile than the market.

A beta less than 1 means the stock is less volatile than the market.

In contrast:

A) The total return on investment measures the overall return, including both capital gains and dividends, but not specifically volatility.

C) The dividend yield measures the annual dividend income as a percentage of the stock’s price, not its volatility.

D) The company’s earnings per share (EPS) measures profitability, not volatility.