{"concept":{"id":14,"slug":"volatility","term":"Volatility","shortDefinition":"A measure of how much an asset's price varies over a period of time -- one of the most common ways of measuring risk, though not the only one.","longDefinition":"Volatility measures how wide an asset's price swings are: the more sharply and frequently its price rises and falls, the more volatile it's considered. A highly volatile asset can produce very different outcomes over short periods, while a low-volatility one tends to move more gradually. Volatility is one of the most common ways of measuring risk -- not the only one -- because it's directly observable and quantifiable from price alone, but it doesn't capture everything that makes up an investment's real risk, such as default risk or the risk that a business stops operating."},"relations":{"requirement":[{"concept":{"id":12,"slug":"risk","term":"Risk","shortDefinition":"Uncertainty about an investment's future outcome: the possibility that the actual result will differ from the expected one -- not merely the possibility of losing money.","longDefinition":"An investment's risk is not \"the probability of losing money\" in a strict sense, but the uncertainty about whether the actual result will match the expected one -- that result can be worse than expected, but also better. No investment is completely free of risk, not even holding cash, which carries the risk of losing purchasing power to inflation. Risk isn't uniform across asset types: it varies by issuer, term, and the nature of the instrument. It's directly tied to expected return -- see `return` -- and one way of measuring it, though not the only one, is volatility."}}],"contrast":[],"related":[],"calculatedBy":[]},"curricularPosition":[{"id":12,"moduleId":4,"slug":"what-is-volatility","title":"What is volatility?","summary":"You understand what volatility is, how it relates to risk, and why it isn't the only way of measuring it.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you understand what volatility is, how it relates to risk, and why it isn't the only way of measuring it.\n\n## Content\n\nVolatility measures how much an asset's price varies over a given period of time. A highly volatile asset is one whose price rises and falls frequently and sharply; a low-volatility asset tends to move more gradually and predictably.\n\nVolatility is one of the most common ways of measuring an investment's risk -- but, as you already saw in this module's first lesson, it isn't the same as risk in its full sense, only one of its possible measures. It's a particularly useful measure because it's directly observable from the price, with no need for additional estimates: you just need to look at how much an asset's price has moved in the past to get a sense of its historical volatility.\n\nHowever, volatility doesn't capture everything that makes up an investment's real risk. A bond can have relatively low day-to-day price volatility and still carry default risk -- the possibility that the issuer won't pay, something volatility alone doesn't reflect until it happens. That's why it's better to treat volatility as a useful tool for approximating risk, not as its complete definition.\n\nIn general, and consistent with the risk-return relationship you already saw, assets with higher volatility -- like stocks of small or less established companies -- tend to offer a higher expected return than assets with lower volatility, like bonds from governments with solid finances.\n\n## Example\n\nA young tech company's stock price can rise or fall several percentage points in a single day, while a bond from a government with solid finances barely moves day to day -- the stock is, in this sense, much more volatile than the bond.\n\n## Common mistakes\n\n- Confusing volatility with risk in general -- volatility is one way of measuring risk, not its complete definition; some risks, like default risk, aren't always reflected in advance by price volatility.\n- Thinking a low-volatility asset is risk-free -- it only means its price varies little in the short term, not that it can't have other risks.\n\n## Summary\n\nVolatility measures how much an asset's price varies over time, and it's one of the most common ways -- though not the only one -- of measuring risk. More volatile assets generally tend to demand a higher expected return.\n\n## Self-check\n\nWhy isn't volatility exactly the same thing as risk?\n\nWhy can a bond with low price volatility still carry risk?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you understand what volatility is, how it relates to risk, and why it isn't the only way of measuring it.</p>\n<h2>Content</h2>\n<p>Volatility measures how much an asset's price varies over a given period of time. A highly volatile asset is one whose price rises and falls frequently and sharply; a low-volatility asset tends to move more gradually and predictably.</p>\n<p>Volatility is one of the most common ways of measuring an investment's risk -- but, as you already saw in this module's first lesson, it isn't the same as risk in its full sense, only one of its possible measures. It's a particularly useful measure because it's directly observable from the price, with no need for additional estimates: you just need to look at how much an asset's price has moved in the past to get a sense of its historical volatility.</p>\n<p>However, volatility doesn't capture everything that makes up an investment's real risk. A bond can have relatively low day-to-day price volatility and still carry default risk -- the possibility that the issuer won't pay, something volatility alone doesn't reflect until it happens. That's why it's better to treat volatility as a useful tool for approximating risk, not as its complete definition.</p>\n<p>In general, and consistent with the risk-return relationship you already saw, assets with higher volatility -- like stocks of small or less established companies -- tend to offer a higher expected return than assets with lower volatility, like bonds from governments with solid finances.</p>\n<h2>Example</h2>\n<p>A young tech company's stock price can rise or fall several percentage points in a single day, while a bond from a government with solid finances barely moves day to day -- the stock is, in this sense, much more volatile than the bond.</p>\n<h2>Common mistakes</h2>\n<ul><li>Confusing volatility with risk in general -- volatility is one way of measuring risk, not its complete definition; some risks, like default risk, aren't always reflected in advance by price volatility.</li><li>Thinking a low-volatility asset is risk-free -- it only means its price varies little in the short term, not that it can't have other risks.</li></ul>\n<h2>Summary</h2>\n<p>Volatility measures how much an asset's price varies over time, and it's one of the most common ways -- though not the only one -- of measuring risk. More volatile assets generally tend to demand a higher expected return.</p>\n<h2>Self-check</h2>\n<p>Why isn't volatility exactly the same thing as risk?</p>\n<p>Why can a bond with low price volatility still carry risk?</p>","sortOrder":3,"readingMinutes":5,"difficulty":"Básico","url":"/en/academy/fundamentals/risk-and-return/what-is-volatility"}],"graphSummary":{"root":{"type":"concept","id":"14","depthFromRoot":0,"entity":{"type":"concept","slug":"volatilidad","term":"Volatilidad","excerpt":"Medida de cuánto varía el precio de un activo en un periodo de tiempo -- una de las formas más habituales de medir el riesgo, aunque no la única."}},"depth":1,"returnedNodes":1,"truncated":false,"hasCycle":false,"nodes":[{"type":"concept","id":"14","depthFromRoot":0,"entity":{"type":"concept","slug":"volatilidad","term":"Volatilidad","excerpt":"Medida de cuánto varía el precio de un activo en un periodo de tiempo -- una de las formas más habituales de medir el riesgo, aunque no la única."}}],"edges":[]},"relatedNews":[],"relatedEntities":[]}