Volatility Vs. Risk

by James & Miel on July 19, 2009 · 0 comments

Hi All,

Here is todays topic du jour.

Often one hears the term volatility in the financial news, another word commonly discussed is risk. These terms are sometimes used interchangeably, but are in fact very different.

Volatility is the characteristic of a security, commodity, or market to rise or fall sharply in price in a short term period. For those of you more quantitatively minded, that what the term beta means. The good thing about volatility is that is measurable so you know what you’re getting into if you buy an asset with a high beta.

Risk is the possibility of losing or not gaining in value. There are a LOT of different kinds of risk; hazards related to market performance, exchange rate risk, inflation risk, political challenges, inflation hazard, etc. etc. Risk has a greater degree of subjectivity. Each individual has their own risk tolerance, or degree of volatility that person is willing to observe in hope of realizing a profit.

Bottom line: its important to keep in mind that just because the market is volatile, it doesn’t necessary mean that conditions are risky.

Best,

James



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