Volatility measures the intensity and frequency of price fluctuations of a financial instrument, market, or portfolio over a specific period. It is commonly calculated as the standard deviation of returns and serves as a key indicator of risk and uncertainty. High volatility implies larger price swings and therefore both higher profit potential and higher risk of losses. Low volatility indicates a calmer market environment. A distinction is made between historical volatility (based on past data) and implied volatility (derived from option prices, reflecting market expectations).
Well-known volatility indices such as the VIX measure expected fluctuations in the S&P 500. In risk management, volatility is an important input for calculating position sizes, stop-loss distances, and margin requirements.
