Beta measures the risk of a security relative to the market. A stock with a beta of 1 should have the same expected return as the market. The risk premium on an investment in the overall market is Rm - Rf. The plot of expected returns and beta is called the security market line . The above model is known as the Capital Asset Pricing Model.
B measures the sensitivity to the overall market.
Note that Rf is the nominal risk-free rate, that is it includes the real rate plus expected inflation. Finally, we can also apply the capital asset pricing model to portfolios by substituting the portfolio beta into the above equation. The beta of a portfolio is a weighted average of all the individual betas. We have already discussed risk with respect to bonds. Also, investors may require a higher return to induce them to invest longer term.