Volatility
Volatility is a measure of the amount of uncertainty or risk associated with the size of changes in a security’s value. It is most commonly used to measure the risk of a security or portfolio over a given time frame. Volatility can either be measured by using historical prices or implied volatility. Historical volatility is calculated by taking the standard deviation of the annualized returns over a given period of time. Implied volatility is derived from the market price of a market-traded derivative, such as options.
History of Volatility
The concept of volatility was first introduced by mathematician Benoit Mandelbrot in the 1950s. He used the term to describe the fluctuations in cotton prices. Since then, volatility has become an important concept in finance and economics. It is used to measure the risk of a security or portfolio, and is also used to price options and other derivatives. Volatility is also used to measure the performance of a portfolio or security over a given period of time.
Comparison of Volatility
| Type of Volatility | Measurement |
|---|---|
| Historical Volatility | Standard Deviation of Annualized Returns |
| Implied Volatility | Derived from Market Price of Derivative |
Summary
Volatility is a measure of the amount of uncertainty or risk associated with the size of changes in a security’s value. It is most commonly used to measure the risk of a security or portfolio over a given time frame. Volatility can either be measured by using historical prices or implied volatility. For more information about volatility, you can visit websites such as Investopedia, The Balance, and Investing.com.
See Also
- Beta
- Standard Deviation
- Risk
- Portfolio
- Options
- Derivatives
- Market Price
- Return
- Risk-Return Tradeoff
- Sharpe Ratio
