What is volatility?
Volatility represents the ups and downs of an investment over time.
Volatility describes and measures the ups and downs in the value of the financial investment, i.e. this risk of holding that investment and losing money if it needs to be sold. Investment markets are cyclical, so asset values will rise and fall over time. A higher volatility means a share or a portfolio will have potentially frequent and large changes in value over time. A lower volatility means potentially less frequent or smaller ups and downs.
Volatility is reduced by diversification. In a portfolio of diverse investments, some will go down while others go up so that the portfolio's volatility is lower.
Volatility can be quantified as a number. This is very useful for investors to compare the riskiness of different investments and measure the degree to which they may be exposed to a loss. Volatility is calculated as the standard deviation of returns over time.
See our blog Understanding risk for more details.