It therefore measures the variance or dispersion of returns for a given fund with respect to its average return. It measures the assumed risk of an investment based on the past performance of the fund.
Volatility can be expressed:
- in absolute terms, with specific monetary figures;
- in relative terms, as a percentage of the initial value or the one being compared in the study.
This concept is used increasingly in the financial world, for example to demonstrate whether a fund yield has deviated from its average. If the deviation is significant, it means that the fund has undergone major variations, while a minor deviation indicates that the returns have been more stable throughout the period of time studied. Hence, the greater the deviation, or the greater the volatility, the greater the risk.