Beta

Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.
Beta is a statistical term. It measures the volatility of a stock (or fund) relative to the market (or the benchmark). The value of beta of a stock or fund is always stated against its benchmark, which is always equal to 1.
The measure of an asset's risk in relation to the market (for example, the S&P500) or to an alternative benchmark or factors. Roughly speaking, a security with a beta of 1.5, will have move, on average, 1.5 times the market return. [More precisely, that stock's excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).] According to asset pricing theory, beta represents the type of risk, systematic risk that cannot be diversified away. When using beta, there are a number of issues that you need to be aware of:

(1) Betas may change through time;

(2) Betas may be different depending on the direction of the market (i.e. betas may be greater for down moves in the market rather than up moves);

(3) Estimated beta will be biased if the security does not frequently trade;

(4) Beta is not necessarily a complete measure of risk (you may need multiple betas).

Also, note that the beta is a measure of co movement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market.
If a stock is benchmarked against Sensex and has a beta value, that is, greater than 1 (say 1.5), this indicates that the stock is 50 per cent more volatile than the market as the beta of the Sensex is 1. The stated stock will deliver 15 per cent return if the market has delivered a 10 per cent return in the same period. This implies in a falling market too. If the Sensex delivers 10 per cent negative returns, then the stated stock will fall by 15 per cent in the same period. A beta of less than 1 implies lesser volatility.
The desirable value of beta depends upon the individual risk-bearing capacity. So, while you can expect a high return from a stock that has a beta of 2, you will have to expect it to drop much more when the market falls.
It's important for investors to make the distinction between short-term risk--where beta and price volatility are useful--and longer-term, fundamental risk, where big-picture risk factors are more telling. High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities