What does ‘β’ (Beta) mean in risk measurement?

Beta is
usually used with reference to the stock of companies and is the change in the stock price with
respect to the change in the value of a benchmark, which is usually
the stock market index.

The stock
market index gives a weighted average of the change in price of the stocks
of all the companies that are traded on the exchange. A change in the index due to a change in
the price of the stock of small companies is negligible. This is the reason why the stock market
index is made up of a select number of companies which have the largest market
capitalization.

For the stock of any company, the average change in
its price compared to the change in the value of the stock market index is known as
Beta.

A Beta of more than one implies that the price of the
company's stock price changes by a value that is more than the change in the stock index price.
For example, a stock with a Beta of 1.8 would increase by 18% if the value that the index
increases by is 10%. Beta can also be less than one and in some cases can even be
negative.

Risk increases with an increase in Beta. This is due to
the fact that the value of the stock market index can move up as well as down. Just as a high
beta stock's price would rise up by a value higher than an upward change in the stock market
index, when the index drops the high beta stock price shows a much larger drop in
price.

The Beta of a stock is taken as one of the important measures
of risk and, when stock is bought or a portfolio is created, the Beta is kept at a level that
suits the risk appetite of the investor.