Beta measures how much a stock moves when the market moves. Beta of 1.0: the stock moves exactly with the market. Beta of 1.5: if the market rises 10%, the stock rises 15% (and falls 15% when the market drops 10%). Beta of 0.5: the stock moves half as much as the market. It is the key measure of systematic risk.
High-beta stocks (1.5+): tech companies, growth stocks, small-caps — more volatile, higher potential returns. Low-beta stocks (0.3-0.7): utilities, consumer staples, healthcare — defensive, steadier. Negative beta (rare): the asset moves opposite to the market — gold sometimes exhibits this during crashes.
Beta is central to the CAPM (Capital Asset Pricing Model): Expected Return = Risk-Free Rate + Beta × Market Risk Premium. If the risk-free rate is 5%, market premium is 7%, and beta is 1.3, the expected return is 5% + 1.3 × 7% = 14.1%. This is used to calculate the cost of equity, which feeds into WACC and ultimately determines company valuation.