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Investment Volatility Definition and Quiz

A term with a broad meaning to some, and a very specific meaning to others.
  1. Define - Learn about investment volatility of investments.
  2. Context - Use investment volatility in a sentence.
  3. Quiz - Test yourself.
face pic by Paul Alan Davis, CFA
Updated: February 18, 2021
Learn about the context of investment volatility below.

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Understanding Measures of Investment Volatility


Investment Volatility is a general term referring to the variability or dispersion of a measured variable, like the return on an investment or portfolio. While there are many volatility measures, investment professionals often associate the term investment volatility with standard deviation. Other volatility measures include: beta, value at risk and semi-deviation.

In Finance, all other things being equal, lower volatility is preferred over higher volatility. Investment volatility, when measured as standard deviation, and indirectly variance, is always zero or positive. Standard deviation is the square root of variance.

Synonyms: variability, dispersion, standard deviation

For context, the study of investment volatility ranges from easy to to difficult. As a starting point most investors begin with standard deviation because it is the easiest measure to evaluate and is widely used across many fields of study.

For investment analysis and the measurement of risk-adjusted returns, the popular Sharpe Ratio uses the standard deviation as the basis for evaluating risk of an investment or portfolio.

In a Sentence

Jim:  We should always clarify which measure we're using when we refer to investment volatility.
Kay:  Agreed. In the trading world, the term normally refers to options volatility.


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Several academic studies on volatility indicate that positive autocorrelation exists. | True or False?

True. This means that volatility tends to cluster.

If someone said a stock's volatility was 16% per year, which would you assume this referred to? | Beta or Semi-Deviation or Standard Deviation or Beta?

Standard Deviation

Questions or Comments?

Still unclear on Investment Volatility. Check out the Quant 101 Series of 27 financial modeling tutorials in Excel where the focus is on risk measures.

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