Saying "Risk" When We Mean "Volatility"

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Saying "Risk" When We Mean "Volatility"

Posted by ObliviousInvestor 1300 days ago, popular 1299 days ago (http://www.obliviousinvestor.com)
Category: Personal Finance | Tags: investing risk volatility

Unfortunately, even those of us who understand the difference between risk and volatility often use the wrong word. Consequence: People (ourselves included) learn that owning stocks is "risky."

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ObliviousInvestor 1299 days ago

Ah, linquistics. Always sure to excite. ;)

sunnyspeaks 1299 days ago

Let's hope that we haven't taken a risk by electing Obama as President. I's leave it to him to define the terms risk and volatality. :)

thekritz 1299 days ago

As for which term is most appropriate, I think it depends on the context, as well as the competence of the investor. The two terms are certainly not synonymous, however. It's a shame that this article treats them as qualitative/subjective ideas, when in reality, both are highly quantifiable. The BlackSholes model (used to price options) for example, has a variable for volatility, and the WACC model (Weighted Average cost of [corporate] capital uses "Beta" as a proxy for risk.

Not to make this too technical, but as I understand it, risk is measured relative to a certain security (i.e. how risky is owning a stock compared to the S&P500), whereas volatility measures the fluctuations in that stock price relative to historical performance.

ObliviousInvestor 1299 days ago

Hi TheKritz.

I see where you're coming from in that risk and volatility (when defined technically) are quantifiable, objective terms.

My question, however, is this: When your average person uses the word "risk" do they really have such a technical definition in mind? I'd argue that they most certainly do not. And this includes most finance writers.

Personally, I'm in favor of using definitions for risk and volatiltiy that are both meaningful*and accessible to the average person.

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