Definition of 'Volatility'
Volatility is a financial term that represents the differences in trading prices of a security (such as a stock) or a market index (such as the S&P 500) over time. Volatility is measured by looking at the standard deviation of that security or market index.
TheStreet Explains ‘Volatility’
For the purposes of a definition, volatility can be equated with “risk” or “uncertainty,” in the sense that the higher the volatility, the riskier the stock or the index (in the same way that you can expect uncertain outcomes when you talk to a volatile person). When a stock, for instance, demonstrates volatility, its price can vary widely over a short period of time. In turn, the beta of a stock—or the overall volatility of its market price against the returns of a benchmark such as the aforementioned Standard & Poor’s (or S&P) 500—can tell you a lot about how it responds to that benchmark. If a fictitious stock called ACME has a beta of 1.2, that means it has changed 120% for every change in the benchmark, based on price level. A beta of 0.8 has moved 80% for every change in the benchmark. To that end, market indices are useful ways of framing the performance of a stock, as well as useful ways to determine the overall volatility of the stocks it contains. When a market index such as the Dow Jones Industrial Average, demonstrates volatility, the average value of all the stocks contained within the Dow Jones also varies widely over the course of a week or a month.
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