InvestorQ : Is volatility the same as risk and how can I differentiate between volatility and risk in the financial markets?
indhumathi Sayani made post

Is volatility the same as risk and how can I differentiate between volatility and risk in the financial markets?

Answer
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shrinidhi Rajan answered.
1 year ago


Volatility in markets is best understood by the fluctuations or the variance in returns. Over the last few years the NSE publishes the VIX (Volatility Index), which shows how the volatility in the stock markets is moving. The crux of the matter is that volatility is a measure of risk and this risk constitutes the second important dimension of investing after return. In fact, it is your risk appetite that eventually determines your investment mix. Risk is so important that the celebrated writer, Peter L Bernstein, in his landmark book, 'Against The Gods', specifically mentions that “The real reason for progress in the 20th century is due to our ability to understand, measure and manage risk more effectively”.

Risk in markets is best understood in terms of volatility in markets. Now, what causes volatility? There are a variety of factors. Firstly, domestic valuation concerns can cause volatility in the markets. Similarly, a preponderance of traders trying to punt the markets can also cause volatility. Secondly, government policy can cause macroeconomic certainty and lead to volatility in the markets. Thirdly, global events also play a key part. For example, the Fed rate moves, China trade numbers, geopolitical risk of North Korea and West Asia; all these factors contribute to volatility. The logical question, therefore, is what should be y our investment strategy in such volatile markets.