In portfolio management, what does Beta help to measure?

In portfolio management, Beta is a crucial metric that measures systematic risk, which is the risk inherent to the entire market or market segment, as opposed to unsystematic risk, which is specific to an individual asset. By quantifying the relationship between a security's returns and the overall market returns, Beta provides insight into how sensitive an asset is to market movements.

A Beta of 1 indicates that the asset’s price moves with the market. A Beta greater than 1 signifies that the asset is more volatile than the market, while a Beta of less than 1 indicates that the asset is less volatile. This characteristic makes Beta particularly valuable for investors aiming to understand potential fluctuations in their portfolio's value relative to market changes, allowing for more informed investment decisions based on risk tolerance and expected market conditions.

This contrasts with the other options; for instance, while return on investment and annual growth are important performance metrics, they do not account for market risk. Liquidity relates to how quickly an asset can be converted to cash without significantly affecting its price, which is not captured by Beta either. Thus, the primary role of Beta is to assess systematic risk relative to the market, making it an essential tool in portfolio management.