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How Are Volatility And Risk Related In An Investment

In the wide world of finance, there is a wide variety of terms that can sometimes be confusing for those people who are beginning to delve into in the sector. In this sense, volatility in investments is a concept that any investor, both novice and experienced, should know. 

In this post, we will explain what it is and what the relationship is between volatility and risk. We will also explain the main indicators used to measure volatility in financial markets.

Concept of volatility in investments

Volatility in investments refers to the fluctuation in the price of an asset or market over time with respect to its average value . The greater these fluctuations are in a given period of time, the more volatile that asset or market is considered. For example, if the price of a share experiences significant changes it will be said That this stock has a high volatility, so it will be more difficult to predict its behavior and, therefore, it will incorporate greater uncertainty for the investor… a>

Investors must know the volatility of an asset in order to have an idea about its possible stability and predictability, or not,. This understanding allows you to make decisions about when to enter or exit an investment based on the risk you are willing to assume. Furthermore, knowing the volatility of assets helps make decisions about the diversification of the portfolio and its risks.

Volatility can arise due to various factors, such as economic news, business results or political changes, among others. 

Relationship between volatility and risk

The risk is related to the possibility that an investment does not achieve the expected profitability or even incurs losses, losing part or all of the capital that has been initially invested. The usual way in which risk is generally measured is volatility. Thus, an asset with high volatility can experience sudden and frequent price changes. This can translate into greater opportunities for profit or loss, and therefore potentially greater risk.

Main indicators of financial markets

One of the best-known indicators is the VIX Index, which measures the expected market volatility ofAmerican stocks in the next 30 days. This index is also known as the “fear indicator” as it tends to increase during periods of market uncertainty.

In Europe, the VSTOXX measures the expected implied volatility in the next 30 days of the Euro index Stoxx 50, which is one of the main stock indices in the eurozone. This index includes the top 50 companies in the eurozone in terms of free float market capitalization. 

There are also other indicators such as the Bollinger Band. These indicators offer investors a more complete view of market volatility.

Investing in financial instruments is a complex action with many nuances that must be taken into account. Market fluctuations, new financial instruments and changing global economic dynamics make it necessary to be constantly updated and always informed. Remember that before making financial decisions about the volatility in investment funds, it is better to have the advice of a team of experts specialized in the matter.

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