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Category — Analytical Metrics
Volatility is a statistical measure of the spread in the price of a security or market index. Most often it’s measured as a standard deviation or variance. It is positioned as one of the tools for assessing the risk of an asset. The higher the volatility, the higher the risk, since there is high probability that the value of an asset can change significantly in a short period of time.
Asset volatility is a key factor in the pricing of options contracts.
There are two main types of volatility
• Historical - the percentage change in the daily return of an asset based on historical prices, which is the degree of volatility in the return of an asset in the current time.
• Expected - market forecast for asset value fluctuations based on current volatility and market sentiment. Is a decisive factor in option pricing. Options with high predicted volatility have higher premiums due to potential risk
The main difference between variance and volatility is that volatility is limited to a specific time frame. Thanks to this, the market distinguishes between daily, weekly, monthly and annual volatility.
Terms from the same category
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