Volatility refers to the degree of variation in the price of an investment over time. It is typically measured by the standard deviation of returns and is a common measure of the risk associated with an investment. High volatility indicates that the value of the investment can change dramatically over a short period, while low volatility suggests more stable performance.
Volatility is a key factor in assessing the risk level of an investment. Investments with high volatility are generally considered riskier, as they are more likely to experience rapid and significant changes in value. This can be attractive to investors looking for high returns and willing to accept higher risk, but less desirable for those with lower risk tolerance.
Understanding volatility is essential for portfolio diversification and risk management. Investors often balance high-volatility investments with lower-volatility ones to achieve a desired risk-return profile. It's also important to consider the time horizon and investment goals, as long-term investors may be better positioned to withstand short-term volatility.
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