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Volatility

In short

Degree of price fluctuation — higher volatility = more uncertainty and risk

Volatility measures how wildly a stock's price swings. A stable utility stock might move 1% per day. A small biotech might move 10%. Higher volatility = higher risk but also higher potential reward.

Volatility (standard deviation of returns) is the primary measure of risk in modern finance. Historic volatility measures past price swings; implied volatility reflects future expectations. Low volatility periods often precede high volatility (the Great Moderation before 2008).

Related concepts

  • VIX (Volatility Index) — VIX is called the 'fear gauge.' When investors are scared, they buy options to protect themselves, which pushes VIX up. VIX above 30 means real fear in the market. Below 15 means complacency. Extreme fear is often a contrarian buy signal.
  • Portfolio Volatility — Portfolio volatility measures how much your combined investments bounce around. Unlike individual stock volatility, it accounts for diversification — when some holdings go up while others go down, they partially cancel out, reducing overall portfolio risk.
  • Beta — Beta of 1.0 means the stock moves in line with the market. Beta of 1.5 means if the market rises 10%, this stock typically rises 15% — more volatile. Beta of 0.5 means less volatile than the market.
  • Maximum Drawdown — If your portfolio hit $10,000 then fell to $6,000 before recovering, the max drawdown is 40%. It measures the worst experience a real investor would have endured.