Volatility
Volatility measures how much an asset's price or return swings around its average over a given period. It is most often expressed as the standard deviation of returns, annualised so that assets can be compared on the same time scale. High volatility means large, frequent price moves and greater uncertainty; low volatility means steadier prices. Volatility is the most common quantitative proxy for investment risk.
Worked example
Suppose a stock's daily returns have a standard deviation of 1%. To annualise, multiply by the square root of the number of trading days in a year (about 252): 1% × √252 = 1% × 15.87 = 15.87%. The stock's annualised volatility is roughly 15.9%.
Why it matters
Volatility matters because it quantifies the uncertainty investors must endure to earn a return, and it feeds directly into risk measures such as the Sharpe ratio and option pricing. A key pitfall is treating volatility as the same thing as risk of permanent loss — it measures dispersion in both directions, so a rapidly rising asset is "volatile" too, and a low-volatility asset can still fall heavily if its fundamentals deteriorate.
Frequently asked questions
Is high volatility always bad?
Not necessarily. High volatility means greater uncertainty, but it also creates the price swings that long-term investors and active traders can exploit. What matters is whether you are being compensated with adequate expected return.
What is the difference between historical and implied volatility?
Historical volatility measures how much an asset's price actually moved in the past. Implied volatility is derived from current option prices and reflects the market's expectation of future movement.
Related terms: Standard Deviation, Beta