Volatility

Volatility measures the degree of variation in an asset's price over time. High volatility means prices swing dramatically; low volatility means prices are relatively stable.

Measuring Volatility:

Standard Deviation:

• Most common measure
• Measures dispersion from average return
• Higher standard deviation = more volatile

Beta:

• Measures volatility relative to market
• Beta = 1: Moves with market
• Beta > 1: More volatile than market
• Beta < 1: Less volatile than market

VIX (Volatility Index):

• "Fear gauge" of the market
• Based on S&P 500 option prices
• VIX < 20: Low volatility
• VIX > 30: High volatility/fear

Volatility and Risk:

• Not the same, but related
• Volatility = short-term price swings
• Risk = chance of permanent loss
• High volatility stocks can be great long-term investments

Historical Volatility by Asset:

• Individual stocks: 30-50%+ annually
• S&P 500: ~15% annually
• Bonds: 5-10% annually
• Cash: ~0%

Using Volatility:

• Set appropriate position sizes
• Determine stop-loss levels
• Assess risk/reward tradeoffs
• Time rebalancing decisions

Volatility is the Price of Admission: Higher expected returns require accepting higher volatility. This is the fundamental risk-return tradeoff in investing.