What do portfolio betas indicate?

Portfolio betas indicate the portfolio's risk relative to the market. A beta value measures the sensitivity of a portfolio's returns to the returns of the overall market. A beta greater than one implies that the portfolio is more volatile than the market, indicating that it will experience larger fluctuations in returns compared to the market movement. Conversely, a beta less than one suggests that the portfolio is less volatile and tends to move less than the market. This relationship helps investors understand how much risk they are taking on in comparison to the general market risk, making portfolio beta a key metric for assessing investment risk.

While portfolio volatility refers to the standard deviation of the portfolio's returns, and portfolio return denotes the total return on the investment, neither directly encapsulates the relative risk to the market factor that beta specifically addresses. Portfolio liquidity relates to the ease with which assets in the portfolio can be bought or sold without affecting their price, which is not what betas measure. Thus, portfolio betas are critical for evaluating how a portfolio will react to market movements and understanding its risk profile in the context of market fluctuations.