Volatility

– is the degree of variation of a trading price series over time.

Volatile assets are often considered riskier than less volatile assets because the price is expected to be less predictable.

Investors care about volatility because of these reasons:

  • The wider the swings in an investment's price, the harder emotionally it is to not worry;
  • Price volatility presents opportunities to buy assets cheaply and sell when overpriced;
  • Price volatility of a trading instrument can define position sizing in a portfolio;
  • When certain cash flows from selling a security are needed at a specific future date, higher volatility means a greater chance of a shortfall;
  • Higher volatility of returns while saving for retirement results in a wider distribution of possible final portfolio values;
  • Portfolio volatility has a negative impact on the compound annual growth rate (CAGR) of that portfolio.