Volatility vs Risk

Market risk is potential loss in financial markets despite diversification and volatility is change price range of assets.
Volatility vs Risk
3 min

Market Risk refers to the chance of losing money in financial markets, even if you've spread your investments across different assets. Volatility, on the other hand, reflects the extent of price changes in a single security or a group of securities. While assessing market risk can be challenging, volatility is frequently and readily quantified. In finance, both volatility and risk are important concepts. Though they are often used interchangeably, they have distinct characteristic features. To learn the differences between volatility and risk, let us start by exploring what they are and their basic characteristic features.

Understanding volatility and risk

  • What is volatility?
    In finance, volatility refers to the extent of price fluctuation of stocks and other financial securities over a certain period of time. It helps you gauge the unpredictability or stability of that security within the short term or within a timeframe. You can get insight into market dynamics by quantifying the extent of price swings.
  • What is risk?
    Risk refers to the potential for loss in financial security (such as stock) when you invest in it. If you do not get the expected returns from your investment, you may also call it a risk. This is because there is an element of uncertainty about not achieving your expected returns.

There are multifarious factors associated with risks such as:

  1. Market volatility
  2. Economic conditions
  3. Company performance

When you evaluate the risk of a stock or other investment opportunities, it involves the assessment of both the actual and the likelihood of impact of the associated factors on the outcome of your investment.

Difference between volatility and risk

By now, we know the basics of what volatility and risk are and how they are related. Now. let us check what their differences are.

  • What are they?
    • In simple words, volatility measures the extent of a stock’s price movements in a short time or within a time frame.
    • Risk, on the other hand, measures the probability of not achieving the expected ROI or making a loss from investing.
  • How to measure them?
    • You can measure volatility by using quantitative statistical measures such as standard deviation and Beta.
    • The most common quantitative measures of risk analyses are:
      • EMV (Expected Monetary Value) risk analysis
      • Decision tree risk analysis
      • Sensitivity risk analysis
      • Monte Carlo risk analysis
    • Some of the factors that are considered for risk assessment are:
      • Fundamentals of a company
      • Economic trends
      • Market conditions
  • What is the scope?
    • The scope of volatility is limited to only price movements in a time period.
    • In the case of risk, the scope ranges from operational, liquidity, investment outcomes, and credit.

Similarities between volatility and risk

By now, we know the basics of what volatility and risk are and how they are related. Now. let us check what their similarities are.

  • Impact on market
    By far we know that risk and volatility influence your investment decisions. However, it is not restricted to your decisions on investment only. There are other influences too. Volatility and risk effects:
    • Sentiment of investor
    • Prices of securities (such as stocks and bonds) and other assets
    • The behaviour of the market

  • Element of uncertainty
    The foundation of both the concepts of volatility and risk are uncertainties about the future. The uncertainty can be:
    • The potential to make a loss (which is the concept of risk)
    • The extent of price fluctuations (which is nothing but volatility)

Is it right to differentiate between volatility and risk?

Yes, it is very important to know the difference between volatility and risk because it will help you, as an investor, to navigate markets effectively.

This will help you manage your risks accordingly. It will enable you to plan your investment strategies as per associated risks and create a diversified portfolio on the basis of your risk tolerance level and objectives of investment.

When you create a diversified portfolio to strike a balance between volatility and risk, you achieve a decent return by managing your risks.

In the world of finance, four things help you by differentiating between volatility and risk are:

  • Precision in analysis
  • Personalised strategies
  • Informed decision-making
  • Effective management of risk

Final words

You should learn the difference between volatility and risk because it helps you understand the dynamics of the market in a better way. It helps you create a more diversified portfolio that lowers your associated risks, on the one hand, and gives you a decent return, on the other.

If you want to invest in mutual funds, you should first start by browsing through thousands of listed mutual funds on online platforms such as Bajaj Finserv Mutual Fund Platform. Once you have chosen multiple mutual fund schemes, you should compare mutual funds, and calculate on either the SIP Calculator or Lumpsum Calculator.

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Frequently asked questions

What is the difference between volatile and risky?
The biggest difference between volatility and risk is their definition. While volatility refers to the price movements of financial assets, risk can refer to the extent of uncertainty regarding liquidity, business, and others.
Why does volatility equal risk?

In the short term, volatility is equal to risk. In a tumultuous market condition, your entire investment can get eroded if a price swing happens against your intended price movement.

How are volatility and risk related in an investment?
Too much volatility can lead to uncertainty in your investment, especially if you are investing for the short term. That’s how volatility and risk are related.
Does high volatility mean high risk?
Yes, high volatility means high risk because unfavourable movement of price can deplete your entire investment in the short run.
What is volatility vs liquidity risk?
Liquidity risk arises if you are unable to enter or exit the financial market easily. This means there are less number of buyers and sellers in the market. Volatility risk, on the other hand, increases when the price of a financial asset (such as stock) changes quickly in quick succession.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.