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Volatility
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The relative rate at which the price of a Security moves up and down.
Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over Short time periods, it has High Volatility. If the price almost never changes, it has Low Volatility.
It depends much prices change with a given investment, Interest rate, or market index. The more prices change, the greater the Volatility.
A measure of Risk based on standard deviation in fund performance over three years.
The scale is 1-9, and a higher rating indicates higher Risk. Volatility mostly refers to the standard deviation of the change in value of a financial instrument with a specific Time Horizon. Often used to quantify the Risk of the instrument over that time period. Volatility is typically expressed in annualized terms, and it may either be an absolute number ($5) or a fraction of the mean (5%). Volatility can be traded directly in today's markets through options and variance swaps.
For a financial instrument whose price follows a Gaussian Random walk, or Wiener process, the Volatility increases as time increases. Conceptually, this is because there is an increasing probability that the instrument's price Will be farther away from the initial price as time increases. However, rather than increase linearly, the Volatility increases with the square-root of time as time increases, because some fluctuations are expected to cancel each other out, so the most likely deviation after twice the time Will not be twice the distance from zero.
More broadly, Volatility refers to the degree of (typically Short-term) unpredictable change over time of a certain variable. It may be measured via the standard deviation of a sample, as mentioned above. However, price changes actually do not follow Gaussian distributions. Better distributions used to describe them actually have "Fat tails" although their variance remains finite. Therefore, other metrics may be used to describe the degree of spread of the variable. As such, Volatility reflects the degree of Risk faced by someone with exposure to that variable.
Historical volatility (or ex-post Volatility) is the Volatility of a financial instrument based on historical returns. This phrase is used particularly when it is wished to distinguish between the actual Volatility of an instrument in the past, and the current (ex-ante, or Forward-looking) Volatility implied by the market.
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Privatebanking.com
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