TLDR:<p>- Volatility refers to the amount of uncertainty related to the size of changes in price<p>- Volatility is often associated with risk: the higher the volatility, the riskier the asset<p>- The higher the volatility the harder emotionally it is to not worry<p>What is volatility? How is it computed?
-> Real life examples<p>Volatility is a key factor to take into account when building a portfolio in order to qualify if an asset is more or less risky.
Volatility appears in Modern Portfolio Theory and has gained a wide acceptance across the financial industry.<p>What is volatility?<p>Volatility refers to the amount of uncertainty related to the size of changes in price.
It is the degree of variation of a trading price series over time, in particular an asset is called volatile when there are big swings in price in either directions.<p>Volatility is relevant because:<p>The wider the swings in an investment's price, the harder emotionally it is to not worry
It can define position sizing in a portfolio
Price volatility presents opportunities to buy assets cheaply and sell when overpriced<p>Mathematical Definition<p>The volatility is just the standard deviation of the returns.
The standard deviation is a measure of the amount of variation of a quantity, the returns. It reflects the average amount a stock's price has differed from the mean over a period of time.
Volatility is without a unit and is expressed as a percentage. While variance captures the dispersion of returns around the mean of an asset in general, volatility is a measure of that variance bounded by a specific period of time.
We can report daily volatility, weekly, monthly, or annualized volatility<p>For practical examples see plots and figures in the full article