VolatilityFinancial Dictionary -> Investing -> Volatility
Two volatility types can be distinguished: historical and implied volatility. The implied volatility is the standard deviation which forces values, obtained through an option pricing model, to equal the current market price of the option. Implied volatility is sometimes regarded by investors as a forward-looking indicator of market fluctuations.
Historical Volatility refers to a measure of price fluctuation over time. Historical volatility uses daily, weekly, monthly etc. price data to empirically assess the past volatility of a market or an instrument. It is often expressed as a percentage and calculated as the standard deviation per annum with regard to the percentage change in daily prices. Often times, historical volatility is viewed as the best indicator of a movement of a stock.
There are various ways to assess volatility, one of them being the so-called Beta. This instrument is among the most popular models for measuring risk. It is a statistical measure used to determine the volatility of a fund compared to the volatility of its index or its benchmark. A beta that is greater than one suggests greater volatility while a measure of less than one refers to less volatility than the benchmark. In a bear market, one would choose more stable funds which have a beta of less than one, as the funds will probably decline less in value, compared to the overall market in the near future. On the opposite in a bull market, one will invest in stocks or funds with a beta of more than one, thus increasing the chances of beating the market.
In a nutshell, volatility represents a handy measure for decision taking, though overlooked by inexperienced traders.