The definition of volatility is the mechanism that measures the variability of the trajectories or fluctuations of prices, of the interest rates, of the profitability of a financial asset and any financial asset on the market.
When the price of an asset reflects many movements and very quickly, it is said to be very volatile and only measures the past performance of the fund.
What is volatility in finance?
The RAE defines that volatility is the instability of prices in financial markets. Therefore, it addresses the variation in the profitability of a financial asset with respect to its average during a specific period of time.
This term is being used more and more in finance and funds. The volatility of a mutual fund reflects how the profitability of a certain fund has deviated from the historical average. That is why the standard deviation is used as an indicator of volatility.
When it is a high standard deviation, it will mean that the fund's returns have undergone significant variations, while if it is a low standard deviation, it will reflect that returns were more stable over time.
Volatility is also one of the most important aspects when investing in financial markets. It refers to the magnitude with which financial assets oscillate. The greater the magnitude of the movement, the greater the volatility. It is the case of cryptocurrencies, whose price is said to be very volatile, due to the strong rises and falls that occur regularly.
The volatility in the stock market influences when it comes to being said for a specific product in the market. Investors will generally be interested in those assets They move stronger than others, so they will look for volatile assets. Meanwhile, another group of investors, those who think more long-term, will opt for low-volatile investments.
Volatility can be of two types: short term, medium and long term.