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Volatility can refer to any basic process that complements a trigger mechanism.
In financial economics, volatility is a quantification of
risk based on the standard deviation of an asset's historical return.
To fix ideas, imagine that over the relevant period, a given asset has never returned
more than 20% in a financial quarter on any dollar invested. Over the same period, the
worst performance is a loss of 5% of the dollar.
In such a situation, a full plot of the returns by quarter would generally take the shape of the famous bell curve, or normal distribution. The 20% gain would be one "tail" of that
curve. The 5% loss would be the other tail. Given an unskewed curve, 7.5% gain would be the mean asset return.
The "standard deviation" measures the width of the central
hump of such a bell curve. That is also called the "volatility" of that asset because by definition the higher the number, the more wildly results may vary from quarter to quarter.
The volatility of an asset is crucial in the determination of the value of any future claim upon that asset.
See also
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