volatility
vol-uh-TIL-i-tee
/ˌvɒləˈtɪləti/
The liability to change rapidly and unpredictably, especially for the worse; in finance, a statistical measure of the dispersion of returns for a given security or market index.
High volatility means an asset's price can swing wildly in a short period. It's often associated with higher risk, but also potentially higher returns for those who can tolerate it.
The story behind the word. The word 'volatility' comes from the Latin 'volatilis,' meaning 'flying' or 'fleeting.' It originally described substances that evaporate quickly, like alcohol. By the 17th century, it began to be used metaphorically for things that change quickly or unpredictably, eventually finding its precise financial meaning in the 20th century to describe rapid price movements.
Word relationships
- instability: A general term for lack of stability; 'volatility' specifically implies rapid and unpredictable changes.
- fluctuation: Refers to irregular rising and falling, but 'volatility' emphasizes the rapidity and magnitude of these changes.
- stability: The state of being stable and unchanging.
- predictability: The quality of being able to be foreseen or foretold.
Commonly confused with
- risk: 'Volatility' is a measure of price fluctuation; 'risk' is the broader concept of potential for loss or deviation from expected returns, of which volatility is a key component.
Word family
- volatile (adjective): Liable to change rapidly and unpredictably, especially for the worse.
- volatilize (verb): To make or become volatile.
Collocations
- market volatility
- price volatility
- high volatility
- low volatility
- measure volatility
Example sentences
- "Investors with a low tolerance for risk often avoid assets known for their high volatility." The stock market experienced extreme volatility during the financial crisis.
- "Despite the daily volatility, the long-term trend for the tech sector remained upward." Cryptocurrencies are notorious for their price volatility.
Memory hook
Think of a 'VOLATILE' market as prices 'VOL'cano-ing up and down unpredictably. VOLATILITY: prices 'fly' up/down.
When not to use
Do not use 'volatility' to describe a steady, predictable change or a complete lack of movement.
Fun facts
- The VIX (Volatility Index), often called the 'fear index,' measures the market's expectation of future volatility.
- Volatility is typically measured using the standard deviation of returns.
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