Glossary entry
Volatility describes how much an asset's price or returns fluctuate over a period. Historical volatility is calculated from past movements, while implied volatility is inferred from option prices using a model. Greater volatility indicates a wider range of possible outcomes, but it does not identify the direction of the next move.
Illustrative example
Two assets can finish a month at the same price while one experiences much larger daily swings. Their monthly outcomes match, but their volatility differs.
What to consider
Past volatility can change abruptly. A low recent reading does not mean an asset cannot experience a sharp loss.
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