What does the Beta (B) in the CAPM formula indicate?

The Beta (B) in the Capital Asset Pricing Model (CAPM) formula is crucial for understanding the relationship between the risk of an individual stock and the overall market. Beta measures the sensitivity of a stock's returns to the movements of the market as a whole. A beta greater than 1 indicates that a stock is more volatile than the market, meaning if the market goes up or down, the stock is expected to move even more significantly in the same direction. Conversely, a beta less than 1 implies that the stock is less volatile than the market, providing a cushion against market swings. Thus, beta serves as a measure of relative risk, allowing investors to assess how a stock might perform relative to market movements, making it crucial for portfolio construction and risk management in finance.

The other options provided do not accurately capture the function of beta within the CAPM framework. For example, while the average performance of a company’s stock might be related to its historical returns, this does not reflect the relative risk measure that beta provides. Similarly, the market’s predicted return falls outside the scope of what beta indicates, as CAPM separates risk (represented by beta) from expected returns. Lastly, dividend yield measures income generated by a stock and is not a