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Volatility

Volatility is a risk measure of how much an asset’s price fluctuates over a period, usually expressed as the standard deviation of returns. Volatility summarises the size and frequency of price moves.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • Highly volatile assets can produce large gains or losses quickly, while low volatility means a more predictable path.
  • Annual volatility of 30% means the price is expected to stay within a ±30% band over a year with roughly two-thirds probability.
  • volatility measures magnitude, not direction; it can be high in rising markets too.

Formula / calculation

Daily volatility = Standard deviation of daily returns; Annual volatility = Daily volatility × √252. Implied volatility is the future volatility the market expects, derived from option prices.

Interpretation

It is the core input of option pricing and risk management.

Annual volatility of 30% means the price is expected to stay within a ±30% band over a year with roughly two-thirds probability. Investors can set a target volatility to match their risk appetite and allocate accordingly.

Pitfalls

volatility measures magnitude, not direction; it can be high in rising markets too. Past volatility does not guarantee the future and spikes suddenly in crises. Do not confuse it with beta: beta is relative to the market, volatility is absolute.

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Frequently asked questions

Volatility is a risk measure of how much an asset’s price fluctuates over a period, usually expressed as the standard deviation of returns.

Daily volatility = Standard deviation of daily returns; Annual volatility = Daily volatility × √252. Implied volatility is the future volatility the market expects, derived from option prices.

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