Volatility

Standard deviation is a statistical measurement that, when applied to an investment fund, expresses its volatility, or risk. It shows how widely a range of returns varied from the fund’s average return over a particular period. Low volatility reduces the risk of buying into an investment in the upper range of its deviation cycle and then seeing its value head toward the lower extreme. FE measures volatility to one standard deviation, which means that 68% of returns will have fallen within that volatility band.

For example, if a fund had an average return of 5%, and its volatility was 15, this would mean that the range of its returns within one standard deviation had swung between +20% and -10%. Another fund with the same average return and 5% volatility would return between 10% and nothing, but there would be no loss in the majority of cases.

While volatility is specific to a fund’s particular mix of investments, and comparison to other portfolios is difficult, for those that offer similar returns the lower-volatility funds are preferable. There is no point in taking on higher risk than necessary in order to achieve the same reward.

Both volatility and annualised volatility are available.