Volatility
How widely a price swings, measured by the standard deviation of its returns.
Measuring the size of swings
Volatility is the standard deviation of an asset’s returns, expressed on an annual basis. A stock with 30% volatility moves, roughly one year in three, by more than 30% around its average. Historical volatility is computed from past prices; implied volatility is read from option prices, like the VIX.
Illustration: orders of magnitude in normal times.
Orders of magnitude
Major equity indices run at 15 to 20% a year in normal times, a 10-year government bond 5 to 10%, bitcoin often 50 to 80%. Volatility jumps in crises and comes down slowly.
Formula
Volatilité annuelle = écart-type des rendements quotidiens x √252
- 252: number of trading sessions in a year
Worked example
Annualising daily volatility
- A stock’s daily returns have a 1.2% standard deviation.
- √252 ≈ 15.87.
- Annual volatility: 1.2 x 15.87 ≈ 19%.
About 19% volatility, typical of a major equity index.
Common mistakes
- Confusing volatility with the risk of permanent loss.
- Assuming low volatility will last.
Notitia newsroom · education, not investment advice.