Volatility

How much and how often an asset's price moves, up or down, over a given period.

Example

A stock that swings 5% most weeks is far more volatile than a government bond that barely moves.

Important

Volatility measures movement, not loss. An asset you never sell during its swings can still deliver the return you originally expected.

Related terms

• Risk — The chance that an investment's actual outcome differs from what you expected, in either direction.
• Drawdown — The decline from an investment's highest point to its lowest point before it recovers.
• Mark to market — Valuing an asset at what it would sell for right now, rather than at what you originally paid for it.

Lessons that explain it

• For most alternatives, the entire return is one number: the exit price minus everything paid to get there — Without a dividend or a coupon, appreciation is the whole story for art, wine and watches - and it only becomes real at an actual sale. Farmland and royalty interests instead compound the way an income-producing asset does, cash paid out year after year. (11 min)
• Nothing arrives while you wait, and the wrapper sets the tax — Large declines with no income to cushion them, a running charge on an asset that pays nothing, a roll cost that hides inside a price - and in the United States, three wrappers around the same metal taxed three different ways. (12 min)
• Many venues, no closing bell, no reference price — The quote is for the next unit, not for your position, and there is no official price anywhere. What valuation models exist for this class are contested in a way that a bond discount or an equity multiple simply is not. (12 min)
• Total loss is an outcome here, not a tail — Four separate routes lead to zero, none of them exotic. Then the volatility arithmetic, the costs nobody totals, and a tax treatment that can leave a bill in currency against a position that has already fallen. (13 min)
• You pay for intrinsic value, time and uncertainty - and time runs out — An option's price has two parts: what it would be worth if exercised now, and extra value for the time and volatility left. That second part shrinks to zero by expiry. (12 min)
• Correlation: what actually moves together — Diversification is only worth what the independence behind it is worth, and correlation is how that independence is measured - including the fact that it changes exactly when you need it not to. (12 min)

All 578 terms in the Investing glossary