What does the beta of an asset indicate?

The beta of an asset measures its sensitivity to market movements, which is a key concept in the Capital Asset Pricing Model (CAPM). Specifically, it reflects how much the asset's price is expected to change in relation to changes in the overall market price. A beta greater than one indicates that the asset is more volatile than the market, meaning it typically experiences larger price swings in response to market movements. Conversely, a beta less than one suggests that the asset is less volatile.

Understanding beta is crucial for investors as it helps in assessing the risk associated with a particular asset compared to the market as a whole. This sensitivity factor allows investors to make informed decisions about portfolio construction and risk management, ensuring that they are adequately compensated for the risk they take on with their investments.

In contrast, the other options address different aspects of investing: the historical performance pertains to past returns without indicating sensitivity, total risk encompasses both systematic and unsystematic risk factors, and growth potential focuses on future earnings prospects rather than market correlation.