Volatility — definition, measurement, and what it signals. Volatility quantifies how much an asset’s price tends to move up and down around its average return; practitioners often measure it using standard deviation of returns or more advanced measures like realized volatility and implied volatility (from options). High volatility indicates larger and more frequent price swings and therefore greater short-term uncertainty. Volatility itself is not inherently “bad”: for long-term investors it can present buying opportunities, while for traders it creates profit potential. The distinction between risk (chance of permanent loss) and volatility (magnitude of price swings) is important: an asset can be volatile but not fundamentally at risk if the underlying cash flows remain strong.

Using volatility in portfolio decisions and risk management. Investors measure volatility to set expectations, size positions, and design risk budgets. A risk-aware investor matches portfolio volatility to their risk tolerance and time horizon—long horizons typically tolerate higher volatility. Volatility also feeds into asset allocation, position sizing, and option pricing. To manage volatility: diversify across low-correlation assets, use a glidepath or target-risk portfolio, and rebalance periodically. For tactical uses, investors can hedge with options or choose volatility-managed funds, but those approaches introduce costs and complexity. Focus first on aligning overall portfolio volatility with goals and then refine with targeted tools if needed.