Volatility is how much uncertainty or risk is present regarding a change in the value of a security. It indicates how much and how quickly the value of an investment, market or market sector changes over time.
The consensus is that the higher the volatility, the riskier the security. Volatility also refers to the amount of uncertainty to the magnitude of changes in the value of a security over a given time frame.
In 1933, the Chicago Board Options Exchange (CBOE) introduced the CBOE Volatility Index, more commonly known as the VIX or the “Fear Index.” It is important because it does measure the stability of a security or market, which plays a role in understanding the risk of a security.
The good news is that with proper diversification in a portfolio, the variance (or volatility) of one’s returns can be reduced greatly. This is the reason one is strongly advised against investing too much of a portfolio into a single stock or even an asset class (like small-cap stocks or corporate bonds).
The volatility of a stock price compared to the overall market is its beta. Beta shows the overall volatility of a security’s returns. For example, a stock with a beta value of 1.1 has historically moved 110% for every 100% move in the benchmark, based on the price level. On the other side, a stock with a beta of 0.9 has historically moved 90% for every 100% move in the underlying index.