how volatility affects investments

Surely you must have heard about the oscillations of the financial market, right? 

For these peaks and valleys of the monetary world, we call volatility as the term that can directly affect your investments, yield good profits or maximize risk of losses. 

But, after all, what does volatility really mean and what kind of impact can it have on the investment portfolio? 

If you are new to the investment world, it is essential that you know some concepts and how they can generate bonuses (or encumbrances) before making the decision to apply your capital. 

Below, you can enjoy a complete guide on volatility, which contains all the content you need to design a solid and functional strategic plan, increasing your earnings with as little risk as possible.

What is investment volatility?

In the investment space, we directly refer to the fluctuations that the price of an asset goes through in a given period of time. 

We also talk about its intensity and frequency, two fundamental aspects in volatility analysis. 

Through this analysis, the investor is allowed a broader perspective of the variation in the value of his security in the future.

Thus, it offers the opportunity to better study the behavior of a certain asset before the investor invests capital, establishing the chance of good returns and/or whether or not it is worth the risk.

With this information established, those who intend to invest can outline an investment strategy , choosing how much, when and where they want to risk.

It is impossible to talk about the study of price movement, without talking about risk, since they are interconnected – even if they do not mean the same. 

You may ask yourself “ok, but then how will I know which asset is less or more risky when investing?” and the answer will be exactly in the volatility analysis. 

The volatility quotient indicates the chances of an increase or decrease in the price of the asset in a time X. The more volatile a security is, the more oscillations go through it, therefore, it has a higher risk index. 

If you own a volatile asset, you can use this knowledge to find out the best time to sell, which is very interesting from a financial point of view.

what is volatility

The 3 types of volatility

Before proceeding with the analysis of volatility and how it impacts your investments, it is necessary to know that there are three different types, with different approaches when considering the quotient of an investment. You can check it out right away.

Historical Volatility

It is based on what the name implies: the history. It is the indicator responsible for measuring changes in the price of a given asset in terms of its oscillation in a given period in the past. 

From the discovered data, it is possible to discover a “trend” and thus draw a future estimate of behavior.

It is important to highlight that, as the financial market does not follow a linearity, the estimates are nothing more than predictions that may or may not come true.

Implied Volatility

Just as the historical looks to the past, the implicit looks to the future. 

Using historical variations and some other variables as a basis, it is calculated taking into account derivatives market projections, for example.

Actual Volatility

The real corresponds to the effective change in the value of the asset in the future. However, there is a latent question about it: from the moment the oscillation becomes known, it is no longer part of real volatility, but of historical volatility.

What affects volatility in the market?

The financial market, as previously mentioned, does not follow any linearity, on the contrary, it is full of curves and unforeseen events and this directly affects those people who decide to invest capital in assets.

Most of the time, market volatility is caused by economic issues such as interest rate change and fiscal policy. 

Other times, political developments end up impacting – positively or negatively – the economy. 

It can be seen as a reflection of investor sentiment, that is, several factors can influence behavior, directly affecting volatility. 

Any market that fluctuates more or less by 1% for a given period of time, sustaining fluctuating indices, is considered volatile. 

While it can be stressful for investors, swings are actually a normal part of investing. Some factors directly influence these price fluctuations and, among them, we can highlight three main ones.

Political and Economic Factors

The government plays a fundamental role in influencing the factors that affect the variation of asset prices.

They are the ones who act in the regulation of industries and can interfere in the financial market by taking decisions on trade agreements, legislation and monetary policies.

Economic data also play an important role, because it is from the development of the economy that investors react and apply their capital.

Monthly employment reports, inflation data, consumer spending figures and quarterly GDP calculations can affect market performance. On the other hand, if these market expectations fail, markets become more volatile and, consequently, affect the economy.

Company Performance

Some specific events may cause variation within a particular industry and sector. A weather event, for example, can affect the oil sector, fruit exports and grain crops, among many others.

As a result, the stock price of companies related to the sectors in the above example may fluctuate.

Likewise, more government regulation in a specific industry may result in lower share prices due to increased employee costs that may affect future earnings growth.

Investor Confidence

Investors seek to feel secure not only in terms of financial risks, but also in the certainty of putting their money into something solid, of quality, that offers worthwhile products and services. 

This influencer factor is found in positive news such as an earnings report or a new product that is impressing consumers, boosting the brand and improving the stock price.

On the other hand, companies that frequently have recall marks or executive misbehavior, for example, can hurt the stock price and investors withdraw their investments.

Understand the volatility x risk relationship

When talking about risk , we refer to the probabilities of the return on investment being different from the prospect. This means considering the possibility of losing part or even all of the invested amount.

Faced with so many risks, the concept of volatility is used exactly to measure the possible risks of loss, since its quotient provides the frequency and intensity of the variation of securities values.

Riskier assets are more volatile – that is, they have a greater chance of loss (and gain too, in the long run). Less risky assets are less volatile, but they also have lower probabilities of losses and gains.

stock price changes

How important is it for investors to understand volatility?

An investor who knows how to understand this concept is better prepared to devise a functional strategy with good return resources. 

It can be said that this knowledge allows the investor to have a broader notion of the value of a certain security in the future, making it possible to resize its yields and consider risks. 

With this knowledge, investors can more assertively choose how much they want to invest, when and within what timeframe, creating for themselves a strategy with greater probabilities of profitability.

Volatility in different types of assets

Volatility behaves in different ways within the varied universe of assets. Check it out:

Investment Funds

When choosing to invest in funds, one should consider those that have higher or lower volatility, depending on the portfolio and type of each one. 

By deciding to invest in a fund with higher gains, you will be committing to greater risk of loss as well. Those who opt for less volatile funds have lower risk, but also less potential for returns. 

Some investors do not perform these analyzes and invest in fund X because it obtained higher returns in a certain period, which can be a risky move.

With high volatility, the fact that it yielded more last month may reflect greater risks. In this way, the investor exposes himself to a greater probability of loss.

The relationship between risk and return is essential, as the economy is a living instrument that has several variables that are constantly changing.



The Stock Market also offers the possibility for investors to follow the fluctuations of the shares and establish volatility before contributing their capital. 

Within the stock market, this is a fairly common variable. Following volatility ratios, it is easier to find positive sales prospects for profit, even more so if there is interest in spacing.

Foreign Exchange

Currency exchange is another sector that involves volatility, and this is more present in people’s daily lives, where in any radio, newspaper or on the internet it is easy to find out the price of currencies such as the dollar and the euro. 

Currency volatility refers to fluctuations in values ​​at exchange offices in the financial market, where changes in the value of currencies directly influence income and business.

The variation of the dollar, for example, affects not only those who invest in the American currency, but also those who invest in companies that use its quotation as a basis for work, such as exporters and importers.

Another factor is that it feeds the inflationary expectation, since several parts, items and other components started to be imported.

Fixed Income

In this case, the investor is aware of variations in profitability for redemptions made before maturity. In investments in Public Securities , for example, it is not uncommon for the phenomenon called mark-to-market to occur.

Mark-to-market consists of looking at the price at which the security would be sold today and finding a return that is different from when the income was contracted, even if it could be negative.

This only applies to the intention of making early redemptions. When holding to maturity, the contracted amount is made available to the investor.


In case you are not familiar with the concept, an option is called a contract that establishes the right to sell and buy an asset at a specified price in a specified period.

A call, as the call option is called, gives the right (not mandatory) to buy a certain stock in the future. The put option, on the other hand, provides the right to sell the asset until a certain maturity for a pre-agreed value.

volatility calculation

Formula and step by step for calculating volatility

To perform this calculation, a very simple formula is used. However, to actually use it, it is necessary to follow a step by step first. 

First, you need to find the standard deviation of the historical profitability of a given investment. From this calculation, it is possible to discover the daily price movement of the asset. To find this variant that will be in the main formula, calculate:

Daily Profitability = Current Price – Previous Price / Previous Price

The standard deviation represents the daily volatility of the asset.

After finding this variant, we transform the daily volatility into annual volatility. The formula then looks like this:

Annual Volatility = Daily Volatility * √252

Using this formula, it is possible to better base decisions before investing capital in a given asset. Observe different periods and acquire a reference base of how the stocks of your interest are in the market today.

Practical examples

We offer two simple, practical examples that help you better understand from a financial perspective how this feature works.

Suppose a share costs R$100.00 and fluctuates on average R$1.00 more or less daily. Now suppose that another stock, of the same value, oscillates around R$20.00 up or down in one day.

Thus, the first situation is safer, less volatile, but also has a lower yield. The second has high volatility, high risk, but offers a much more attractive return.

However, it is important to consider this ratio not only in the short term, but also in the long term, using annual volatility. We follow with another example.  

Now imagine two different assets, but with the same value: R$ 1,000.00.

Asset “A” has an annual volatility of 30%, while asset “B” has a volatility of 60% per year. 

Putting them in numerical perspective, this means that A can fluctuate between BRL 700.00 and BRL 1,300.00, while asset B fluctuates between BRL 400.00 and BRL 1,600.00.

By investing in asset B, you will have better chances of making money due to the higher volatility, right? In contrast, there is a risk of losing more money too, for exactly the same reason.

Those who invest must know how to evaluate the scenario and balance pros and cons before choosing which asset to invest their capital in.

How to analyze and use volatility to invest better?

Two concepts that are closely connected are volatility and investment success.

Investors who know how to interpret these indices can use market fluctuations to their advantage, not wasting chances of buying and selling during the fluctuation of the financial market.

To analyze volatility indices, you can count on some indicators, fundamental tools when considering buying or selling stocks. 

Sharpe Ratio: return per unit of risk of an asset

The Sharpe Ratio is a statistical performance indicator of funds. 

Its objective is not only to consider the profitability of an investment, but also to draw a parallel between the profitability x volatility relationship, that is, to consider the risk involved in obtaining a certain asset.

It helps to define and answer which investment has the highest return and lowest possible risk.

sharpe index

Beta Index: alternative measure of volatility

The Beta Index, in turn, measures the price movements of a stock in comparison to the performance of a benchmark, the reference standard used by the financial market to evaluate the performance of a certain strategy. 

The Beta Index measures the sensitivity of a stock within the market, considering unpredictable events within the financial sphere. 

How does diversification help protect your investment portfolio?

The financial market has a very unique and varied dynamic and even those who are experienced in the matter cannot foresee all the possibilities of the future with certainty. 

Even if you have a good investment, there is always an imminent risk that the tide will suddenly turn. By diversifying the portfolio , the investor greatly increases security and minimizes the risk of loss to the maximum. 

This is because by not investing all the capital in just one asset, the risk of losses that impact the amount of the portfolio becomes much smaller. You can get bonds of greater or lesser volatility, with different maturities and from different sectors. 

In this way, several influencing factors work to ensure the maximization of their income.



Volatility is an extremely important resource to balance investments, define efficient strategies and diversify the investment portfolio, taking into account market fluctuations. 

Before investing capital, analyze and calculate the volatility quotient and invest your money more consistently and intelligently. For more tips and to learn the best strategies, count on Clube do Valor.