What does volatility measure?

What does volatility measure?

• A. The return on risk-free investments
• B. The sensitivity of a portfolio to market risks
• C. The price variation of an asset over time
• D. The correlation between different assets

Answer: (C)

Volatility is a statistical measure that reflects the degree of variation in the price of a financial asset over a specific period. It quantifies how much the price of an asset fluctuates, indicating the level of risk associated with that asset. A higher volatility implies that the asset's price can change dramatically over a short time frame, which often signals greater uncertainty in expected returns. Therefore, when considering the question regarding what volatility measures, its definition aligns precisely with the concept of price variations in an asset over time. Understanding volatility is crucial for investors, as it helps them assess potential risk and return profiles of their investments. Price variation is a key component in making informed decisions regarding asset allocation, risk management, and ultimately in portfolio management.

Volatility is a statistical measure that reflects the degree of variation in the price of a financial asset over a specific period. It quantifies how much the price of an asset fluctuates, indicating the level of risk associated with that asset. A higher volatility implies that the asset's price can change dramatically over a short time frame, which often signals greater uncertainty in expected returns. Therefore, when considering the question regarding what volatility measures, its definition aligns precisely with the concept of price variations in an asset over time.

Understanding volatility is crucial for investors, as it helps them assess potential risk and return profiles of their investments. Price variation is a key component in making informed decisions regarding asset allocation, risk management, and ultimately in portfolio management.