What is beta used to measure in investment analysis?

Beta is a measure used in investment analysis to quantify the volatility or systematic risk of a stock or portfolio in comparison to the overall market. Specifically, it assesses the extent to which a stock's price movements correlate with the movements of the market index (such as the S&P 500). A beta value greater than 1 indicates that the stock is more volatile than the market, while a beta less than 1 signifies that it is less volatile.

In the context of investment decisions, understanding beta helps investors gauge the risk associated with a particular investment relative to broader market changes, which can be crucial when building a diversified portfolio. This relationship between stock price movement and market changes enhances an investor's ability to manage risk and make informed choices about asset allocation.

The other options represent concepts that, while relevant to investment analysis, do not specifically pertain to what beta measures. For example, the volatility of market conditions encompasses a broader understanding of market behavior beyond just the statistical correlation of a specific stock to the market. Similarly, the average returns of a stock and the risk-free rate of return are separate financial metrics that do not capture the risk relationship that beta provides.