In the financial world, there is a term called as volatility which is used for measuring the risk. Volatility is nothing but the risk associated with the price movement of a financial asset. There are two types of volatility:
Intra-day volatility
Inter-day volatility
Intra-day volatility is the risk of a stock or any financial asset, which is associated with the fluctuations in the prices of the stock in a particular day. Inter-day volatility is the risk that is associated with the fluctuations in the prices of a financial asset on different days.
Volatility is a measure of the risk that a stock will move up or down from its current price. The riskier a stock is the more volatile it will be.
A high level of volatility will make investors nervous, and this will make them want to sell their shares at a lower price. This will lead to losses for the investors.
On the other hand, a low level of volatility will make investors feel comfortable and secure. This will help them to buy the shares at a higher price. This will lead to profits for the investors.
In the financial world, volatility is measured using different ways.
They are:
Standard Deviation
Volatility Index (VIX)
Risk-Free Rate
Volatility is also measured by using different methods such as:
Mean Reversion
Bollinger Bands
Reverse Ratio
Stochastic Oscillator
Volatility is measured by using these methods on the daily basis.
Volatility is also used to measure the risk in a portfolio. It is calculated using the following formula:
Volatility = Standard Deviation / Time Frame
For example, if we are measuring the volatility of an investment over a period of one year, then it will be equal to the standard deviation divided by one year.
Conclusion:
In conclusion, volatility is the risk associated with the price movement of an asset and it is measured by different methods.