What is meant by Volatility?
Volatility is a statistical measure of the standard deviation of a security/ market index's annualised returns over a given period. Simply put, it is the rate at which a stock's price increases or decreases.
If the price fluctuates rapidly in a short period, hitting new highs and lows, it is said to have high volatility. In most cases, the higher the volatility, the riskier the security (since pricing is unpredictable).
For example, when the stock market rises and falls more than five percent over a sustained period of time, it is called a volatile market.
Volatility is measured using methods like beta coefficients, option pricing models, and standard deviations of returns. It is a key factor when pricing options contracts.