Volatility

Loading the player...

What is 'Volatility'

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

2. A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used.

BREAKING DOWN 'Volatility'

In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time 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 against the returns of a relevant benchmark (usually the S&P 500 is used). For example, a stock with a beta value of 1.1 has historically moved 110% for every 100% move in the benchmark, based on price level. Conversely, a stock with a beta of .9 has historically moved 90% for every 100% move in the underlying index.

Ready for more brain power on volatility? Read A Simplified Approach to Calculating Volatility and The ABCs of Option Volatility.

RELATED TERMS
  1. Historical Volatility - HV

    The realized volatility of a financial instrument over a given ...
  2. Beta

    Beta is a measure of the volatility, or systematic risk, of a ...
  3. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
  4. Volatility Arbitrage

    Trading strategies that attempt to exploit differences between ...
  5. Implied Volatility - IV

    The estimated volatility of a security's price.
  6. High Beta Index

    An index composed of companies with high betas trading on the ...
Related Articles
  1. Investing

    3 Reasons to Ignore Market Volatility (VIX)

    If you can keep your head while those about you are losing theirs, you can make a nice return in roiling markets.
  2. Mutual Funds & ETFs

    5 Ways To Measure Mutual Fund Risk

    These statistical measurements highlight how to mitigate risk and increase rewards.
  3. Forex

    Understanding Beta

    Beta is a measure of volatility. Find out what this means and how it affects your portfolio.
  4. Investing News

    Roller coaster 2016 for Stocks? Exploring Global Stock Volatility

    Find out how much volatility global equity investors are in for during 2016 by seeing how much they've experienced over the past five years.
  5. Investing

    Volatile Stocks: Great, If You Have The Stomach

    Volatile stocks can be a lucrative opportunity for short-term traders. For buy-and-hold investors, it's a much different story.
  6. Fundamental Analysis

    How Investment Risk Is Quantified

    FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk.
  7. Investing

    Tips For Investors In Volatile Markets

    Find out what to look out for when trading during market instability.
  8. Mutual Funds & ETFs

    PRHSX: T. Rowe Price Health Sciences Fund Risk Statistics Case Study

    Examine the risk metric of the T. Rowe Price Health Sciences Fund. Analyze beta, capture ratios and standard deviation to assess volatility and systematic risk.
  9. Fundamental Analysis

    High Beta – Low Beta Stocks Define Volatility Trades

    We compare the Beta values obtained from financial sources. Also, how to compute Beta using Excel.
  10. Investing Basics

    What is a Security Market Line?

    The security market line graphs the systematic risk versus return of the whole market at a certain time, and shows all risky marketable securities.
RELATED FAQS
  1. What is the best measure of a given stock's volatility?

    Understand what metrics are most commonly used to assess a security's volatility compared to its own price history and that ... Read Answer >>
  2. How is correlation used to measure volatility?

    See how the correlation between an asset and its benchmark index can be used as a proxy to determine the relative volatility ... Read Answer >>
  3. How does beta measure a stock's market risk?

    Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital ... Read Answer >>
  4. How does my insurance company determine what premiums I have to pay for coverage?

    Learn about some of the quantitative finance measures that investors without a strong math background can use in analyzing ... Read Answer >>
  5. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
  6. What is an option's implied volatility and how is it calculated?

    Learn what implied volatility is, how it is calculated using the Black-Scholes option pricing model and how to use a simple ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center