Risk
Volatility
Also called Standard deviation or Vol
How much an investment’s returns bounce around their average — the standard measure of risk.
How it works
Volatility is the standard deviation of returns, usually annualised and quoted as a percentage. Higher volatility means a wider range of plausible outcomes in both directions.
It is the industry’s default definition of risk because it is measurable and mathematically convenient, not because it captures everything that can go wrong.
Where it misleads people
Volatility treats upside and downside identically. A holding that leaps 30% is recorded as exactly as "risky" as one that falls 30%, which does not match anyone’s actual experience of risk.
Worked example
A portfolio returning 7% a year with 12% volatility spends roughly two years in three within 12 points of 7% — that is, between −5% and +19%.
Related terms
- Standard deviationA statistical measure of how far values typically sit from their average.
- Downside deviationVolatility calculated using only the returns below a threshold, ignoring upside moves.
- BetaHow much an investment tends to move when the market moves, with 1.0 meaning it moves in line.
- DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
- Sharpe ratioReturn above the risk-free rate, divided by volatility — how much return each unit of risk bought.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.