What is Volatility?

All securities such as stocks, bonds or mutual funds, experience daily price movements. Volatility is the rate and degree at which a security’s price fluctuates.

Importantly, volatility does not take the direction of a price movement into account, just the degree of variation of the asset’s price. Therefore, if volatility is said to be high, then a security’s price moves up and down frequently over short periods of time. Likewise, low volatility represents little movement in a security’s price over time.

There are multiple ways to measure volatility to gauge the relative risk of a particular security compared to another security or the overall market. In addition, investors can measure the volatility not only of the individual security, but also their entire portfolio and the overall market. Different calculations include standard deviation, beta, alpha and Sharpe ratio.

Jemma Everyday Wisdom: Securities that experience a high level of volatility are not necessarily “bad” investments. Rather, it’s much more important to consider your short-term and long-term financial goals, your investment time frame, and your ability to tolerate the up and down movements (i.e. your risk tolerance) of the security before investing.