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Volatility

Volatility refers to the degree of variation in the price of a financial instrument over time. It is a statistical measure of the dispersion of returns, often expressed as the standard deviation or variance of returns. High volatility indicates large price swings and increased risk, while low volatility suggests more stable prices. Volatility is a key factor in options pricing and is often used as a proxy for market risk.

Example

A stock that fluctuates by 10% or more on a daily basis is considered highly volatile, whereas a stock with minor price movements of 1% is considered low in volatility.

Key points

• Measures the degree of price variation over time.

• High volatility signals large price swings and higher risk.

• Commonly used in risk assessment and options pricing models.

Quick Answers to Curious Questions

Volatility indicates the level of risk and uncertainty associated with an asset, helping investors assess the likelihood of price changes.

It is typically measured using standard deviation or variance, representing the dispersion of asset returns over a certain period.

Higher volatility increases the value of options, as there’s a greater chance that the option will move into profitability due to larger price swings.