Beta is the extent to which shares in a particular company or units in a managed fund fluctuate with the overall market. Thus it is a measure of volatility. Beta is a statistical estimate, based on historical data of the average percentage change in the share or fund's rate of return based on a 1% change in the market. It follows that the beta for the whole sharemarket is 1. By way of example, if a share has a beta of 1.4 then it would be expected to perform 40% better and 40% worse than the market if it rose or fell. Similarly, a beta of 0.6 would mean a share or fund which was somewhat less volatile than the market. Apart from a tracking error then, beta is what you should get from an index fund which tracks the overall market. What active managers try to do is get alpha on top of beta. See also: http://www.invested.com.au/71/alpha-2023/ and http://www.invested.com.au/71/delta-9132/.