What aspect of risk does beta measure in the context of CAPM?

Beta measures the systematic risk associated with a security in the context of the Capital Asset Pricing Model (CAPM). This specific form of risk refers to the potential for a security's returns to be affected by market-wide factors that cannot be eliminated through diversification. Systematic risk reflects the sensitivity of a security's returns to movements in the overall market. A beta greater than one indicates that the security is more volatile than the market, meaning it tends to gain or lose value more significantly during market shifts. Conversely, a beta less than one suggests that the security is less volatile.

Understanding beta is crucial for investors as it helps them gauge how much market risk they are taking on by investing in a particular security. In this way, investors can make better-informed decisions regarding their portfolios based on their risk tolerance and investment goals.