Credit portal





what is the definition of volatility


A measure of risk based on the standard deviation of the asset return. Volatility is a variable that appears in option pricing formulas, where it denotes the volatility of the underlying asset return from now to the expiration of the option. There are volatility indexes. Such as a scale of 1-9; a higher rating means higher risk.


A measure of a security's stability. It is calculated as the standard deviation from a certain continuously compounded return over a given period of time. It is an important measure in quantifying risk ; for example, a security with a volatility of 50% is considered very high risk because it has the potential to increase or decrease up to half its value. Volatility may influence the type of investments one makes: one may directly invest in non-volatile securities, such as a certificate of deposit. but highly volatile securities lend themselves more to short selling and other forms of hedging .


The term volatility indicates how much and how quickly the value of an investment, market, or market sector changes.

For example, because the stock prices of small, newer companies tend to rise and fall more sharply over short periods of time than stock of established, blue-chip companies, small caps are described as more volatile.

The volatility of a stock relative to the overall market is known as its beta, and the volatility triggered by internal factors, regardless of the market, is known as a stock's alpha.


What Does Volatility Mean?

(1) A statistical measure of the dispersion

of returns for a particular security or market index. Volatility can be measured by using the standard deviation or the variance between returns from the same security or market index; normally, the higher the volatility, the riskier the security. (2) A variable in option pricing formulas showing the extent to which the return on the underlying asset will fluctuate between now and the option's expiration date. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises out of daily trading activities. The way volatility is measured affects the value of the coefficient used.

Investopedia explains Volatility

In other words, volatility refers to the amount of uncertainty or risk regarding the degree and size of changes in the value of a security. A higher volatility means that a security's value potentially can be spread out over a larger range of values. This means that the price of the security can change dramatically over a short period in either direction. A lower volatility means that a security's value does not fluctuate dramatically but changes in value at a steady pace over a period of time. One measure of the relative volatility of a particular stock to the market is its beta. A beta approximates the overall volatility of a security's returns versus the returns of a relevant benchmark (usually the S&P 500 Index). For example, a stock with a beta of 1.1 historically has moved 110% for every 100% movement in the benchmark (based on price). Conversely, a stock with a beta of .9 has historically moved 90% for every 100% movement in the underlying index.

Category: Forex

Similar articles: