Volatility

Volatility of an asset is the dispersion in the prices of the asset and is synonymous with the risk associated with the asset in the market.

Volatility is measured by variance or standard deviations of the past returns of the asset.

Higher the volatility of the asset or security, higher is the risk in investing.

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Volatility can be calculated using two methods.

The first is historical volatility — Data on returns in the recent past is studied, with the assumption that what has happened recently is indicative of the future. 

The second is implied volatility —  Market prices of the security’s derivatives (futures and options) are studied.