Volatility
The degree of variation in an investment's returns over time. Higher volatility indicates larger price swings and is commonly used as a proxy for investment risk.
Volatility refers to how much and how quickly the price of an asset fluctuates. It is most often measured by the standard deviation of returns and can be expressed on a daily, monthly, or annualized basis. The CBOE Volatility Index (VIX), often called the "fear gauge," measures implied volatility for S&P 500 options.
Types of Volatility
- Historical volatility — Calculated from past price data. Useful for backtesting and performance evaluation.
- Implied volatility — Derived from options prices. Reflects the market's expectation of future volatility.
Volatility is not inherently bad—it is the price investors pay for higher expected returns. Stocks are more volatile than bonds, which is why they have historically delivered higher long-term returns. Understanding your personal comfort with volatility is a critical part of assessing your risk tolerance and choosing an appropriate asset allocation.