What is Volatility?
Volatility is a statistical measure of a security’s or market index’s return dispersion. The more the volatility, the riskier the security is in most circumstances. A “volatile” market, for example, is one in which the stock market rises and falls by more than 1% over a long time.
There are several ways to measure volatility, including beta coefficients, option pricing models, and standard deviations of returns.
Example of Volatility:
The formula for daily volatility is computed by finding out the square root of a daily stock price variance.
Daily Volatility Formula is represented as,
Daily Volatility formula = √Variance
Further, the annualised volatility formula is calculated by multiplying the daily volatility by a square root of 252.
Why is Volatility important?
Volatility is a measure of risk, while volatility measures variability. It assists investors in assessing the risk they take when purchasing a specific asset and determining if the purchase will be worthwhile.