Volatility is a statistical measurement of the dispersion of returns for a given security or market index. In other words, it’s a measure of how much the price of an asset, such as stock or commodity, goes up or down for a set of returns. In terms of finance, usually the higher the volatility, the riskier the investment. It is commonly used to quantify the risk of the security over a specified period of time.
1. How is volatility calculated?
Volatility is commonly calculated by finding the standard deviation of the returns of a security over a certain period. It can also be calculated through other methods like variance, average true range, and exponential moving average.
2. What tells you there is high volatility?
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High volatility is indicated when the price of an investment increases or decreases for a set of returns. Markets are often more volatile during periods of uncertainty or market stress, but can also become more volatile as a result of large groups of people reacting to news events.
3. What is implied volatility?
Implied volatility is a market forecast of likely movement in a security’s price. It’s derived from the price of an instrument’s options and is used to set the price of a derivative security.
4. Can volatility be good?
Yes, volatility can be beneficial for certain types of investors. For example, traders may exploit volatility to earn profits from price fluctuations. Furthermore, high volatility can provide investment opportunities as it may cause prices to deviate from their intrinsic value.
5. What does a volatility index do?
A volatility index measures the market’s expectations of volatility over a certain period. It provides traders and investors with an idea of how volatile the market is likely to be. The most well-known volatility index is the VIX, which measures expected 30-day volatility of the US stock market.