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Volatility is a statistical tool that is used to measure the degree of dispersion of the of the return from the mean position. Volatility can be measured by various methods. These include:

  • beta coefficients
  • option pricing models
  • standard deviations of returns

Volatility helps in understanding the risk associated with the magnitude of changes in a security's value.

In statistics, volatility can be calculated using the below process:

  • calculate the mean of the dataset provided.
  • From this number (mean value), subtract each number in the dataset from the mean obtained to achieve the deviation.
  • For removing any negative number, square each number (variation).
  • Now, add all these numbers and then divide the sum obtained by the number of elements in the dataset.
  • Find the square root of this number, which is called the standard deviation and measures risk.

Example explained using excel:

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