volatility

(noun)

A quantification of the degree of uncertainty about the future price of a commodity, share, or other financial product.

Related Terms

Examples of volatility in the following topics:

  • Historical Returns: Market Variability and Volatility

    • Markets and securities may follow general trends, but exogenous factors (such as macroeconomic changes) cause variability and volatility.
    • These types of interlinkages are a cause of the overall market variability and volatility.
    • Furthermore, market variability and volatility can be the cause of what John Maynard Keynes called animal spirits.

  • Overview of How to Assess Stand-Alone Risk

    • Recall that Beta is a number describing the correlated volatility of an asset or investment in relation to the volatility of the market as a whole.
    • In terms of finance, the coefficient of variation allows investors to determine how much volatility (risk) they are assuming in relation to the amount of expected return from an investment.
    • Volatility is measured in the form of the investment's standard deviation from the mean return, thus the coefficient of variation is this standard deviation divided by expected return.
    • The coefficient of variation, an example of which is plotted in this graph, can be used to measure the ratio of volatility to expected return.

  • Beta Coefficient for Portfolios

    • A portfolio's Beta is the volatility correlated to an underlying index.
    • A portfolio's Beta is the volatility correlated to an underlying index.
    • Beta is a normalized variable, which means that it is a ratio of two variances, so you have to compare the volatility of returns to the benchmark volatility.

  • Announcements, News, and Returns

    • There are times when the markets are relatively stable and those when it is relatively volatile.
    • The correlation of 0.769 suggests that the volatility of the stock market in one month is very highly correlated to that in the previous month.
    • Volatility is measured as the standard deviation of S&P 500 one-day returns over a month's period.

  • Advantages of Bonds

    • Bonds have some advantages over stocks, including relatively low volatility, high liquidity, legal protection, and a variety of term structures.
    • The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks).
    • In addition, bonds do suffer from less day-to-day volatility than stocks, and the interest payments of bonds are sometimes higher than the general level of dividend payments.

  • Risk Adjusting for the Time Horizon

    • A longer time horizon usually requires a higher return, due to increased price volatility and uncertainty relating to possible outcomes.
    • A longer time horizon will generally require a higher return, due to an increased risk in price volatility and increased uncertainty relating to possible outcomes.

  • Black-Scholes Formula

    • The Black-Scholes formula explains the relationship between the price of the stock, volatility, the price of the financial derivative (such as an option), and time .
    • reversible, as the model's original output, price, can be used as an input and one of the other variables solved for; the implied volatility calculated in this way is often used to quote option prices
    • The Black-Scholes formula where S is the stock price, C is the price of a European call option, K is the strike price of the option, r is the annualized risk-free interest rate, sigma is the volatility of the stock's returns, and t is time in years (now=0, expiry=T).

  • Defining Options and Their Valuation

    • An estimate of the future volatility of the underlying security's price over the life of the option.
    • More advanced models can require additional factors, such as an estimate of how volatility changes over time and for various underlying price levels, or the dynamics of stochastic interest rates.
    • The application of the model in actual options trading can be clumsy because of the assumptions of continuous (or no) dividend payment, constant volatility, and a constant interest rate.
    • Where: N is the cumulative distribution function of the standard normal distribution; T - t is the time to maturity; S is the spot price of the underlying asset; K is the strike price; r is the risk free rate; and omega is the volatility of returns of the underlying asset.
    • In this particular example, the strike price is set to unity, the risk-free rate is 0.04 and the volatility is 0.2.

  • Measuring Risk

    • Beta describes the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
    • Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.
    • Higher-beta investments tend to be more volatile and therefore riskier, but provide the potential for higher returns.

  • Risk and Return Considerations

    • Beta describes the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
    • Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.
    • Higher-beta investments tend to be more volatile and therefore riskier, but provide the potential for higher returns.