If you’re someone that likes to stay up-to-date on the financial news cycles, you’ve probably heard the term “volatility” tossed around whenever the market starts moving around a lot. The term itself isn’t that difficult to understand. Most of us know what it means when something is “volatile.” But maybe you didn’t know that volatility in the markets is also measured and tracked on an index.
In financial terms, “volatility is a statistical measure of the dispersion of returns for a given security or market index.” You can think of it in terms of how much the graph of an asset's returns swings up and down. The higher the highs and lower the lows, the more volatile the returns are. Typically, a riskier asset has more volatile returns. For example, if you were to graph the returns of a small cap company and then compare them to those of a treasury note, you’d notice that the graph of the small-cap returns looks a lot busier than that of a conservative treasury note. This makes sense when you consider that volatility is typically calculated using an asset's standard deviation or variance – both related measures of risk.
When you hear talk of volatility, it’s important to remember that volatility is relative. The markets may seem volatile right now because returns have been smoother in the past. Likewise, a blue-chip stock may be more volatile than a treasury bond but less volatile relative to a tech stock. It’s important to keep this relativity in mind when volatility pops up in the news.
“What is ‘Volatility’”. Investopedia. https://www.investopedia.com/terms/v/volatility.asp.