Standard deviation
The statistical measure behind volatility: how far returns typically stray from average.
If a fund returns 8% a year with a standard deviation of 15%, then in roughly two years out of three the annual return lands somewhere between −7% and +23%.
It assumes returns follow a normal distribution. They do not. Market returns have fat tails: extreme events happen far more often than the bell curve predicts, which is precisely why models built on it fail in crises.
Volatile is not the same as risky
The jumpy line ends higher. The calm one quietly walks to zero. Volatility is what you feel; risk is what actually takes your money.
It is the raw ingredient of nearly every risk measure in finance.
Trusting it in the tails. The events that ruin you are exactly the ones it says are impossible.
Related terms
See Standard deviation on a real company
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