Investment volatility is a measure of how risky a particular investment is, and it is used in the pricing of assets to gauge fluctuations in returns on investment. This simply means when the volatility is high, the trading risks are higher and vice versa. Investment volatility is further categorized into the following types.
1. Implied volatility: this reflects how the marketplace views where volatility should be in the future, but it does not forecast the direction that the asset’s price will move.
2. Historical Volatility: this is a statistical measure of the dispersion of returns for a given security or market index over a given period of time. The higher the Historical Volatility (HV) value, the more risky the investment.