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In the financial world, a fundamental risk is
Volatility is the size and
frequency of changes in a stock, bond, or other security—or in a stock, bond or
other securities market as a whole.
How far and how fast does a stock or the stock market rise or
fall in a given period? The answer to this question describes the degree of
For instance, say you are considering purchasing one of two
stocks issued by similar health-related companies. Over the past 10 years, Stock
A has annually posted a stable return, always in the 8 percent to 10 percent
range. Stock B, on the other hand, has posted both big annual gains and losses;
one year it was down 20 percent from the previous year. Yet at the end of the
10-year period, Stock B posted an average annual gain of 14 percent per year.
Clearly, Stock B is more volatile than Stock A.
In the above example, Stock A and Stock B performed differently
due to internal performance issues—maybe Company B experienced a high rate of
executive turnover or experimented more heavily with new product introductions.
But sometimes a crucial factor in a stock's performance is not an internal
issue, but a marketplace issue. For instance, most stocks might be either
boosted (in the case of a bull market) or dragged down (in the
case of a bear market) by prevailing marketplace trends.
That is where market risk comes in.
risk is the fluctuation of investment prices due to investor demand (or
lack of demand) for securities in the market as a whole.
Some market risk refers to the portion of a stock or other
security's risk that is shared by all similar securities. If the bond market is
generally down, it is demonstrating market risk. Market risk affects all classes
of securities. However, market risk may also affect securities individually. If
a company is perceived as a good investment, its price will rise as investor
demand increases, even if the market in general is down.
Next up: How to judge the level of risk in