Business Magazine

Volatility Versus. Risk

Posted on the 16 December 2011 by Rodrigosucupira @rodrigosucupira
The modern portfolio managementnecessarily lead to financial risk metrics. The concept of risk and volatility,however, are not fully understood, including the financial surrounding.
Risk is a possibility of financialloss. In the financial market through a few different types of risk such as operationalrisks (related to typical human failures) or the credit risk (mainly in debt securities),but the main risk is considered in the financial market risk. This risk is alsoknown as volatility.
Volatility versus. Risk
Volatility represents the levelof fluctuation in the price of paper. If priced paper financial bounce, either upor down, an observed behavior in crisis, their volatility is so high.
Standard Deviation
This metric is obtained throughstatistical techniques, but can be understood intuitively. The standard deviation,which is a measure for dispersion is often used by the market to quantify marketrisk. This measure takes into account an assumption that the returns of the assetprice analysis assumes a normal distribution.
Risk is Good or Bad?
Risk, by its very definition isunwanted because it is the representation of their financial loss. However, thevolatility is not always undesirable since it is on account of it that makes itpossible to profit by the financial investment or speculation.
It seems somewhat paradoxical toimagine two very interconnected which is an unwanted and the other is desirable. But if we imagine free marketvolatility, we cannot think of speculative gains.
Volatility is Good or Bad?
Volatility is a natural featureof financial markets and reflects the diverse interactions of market participants.For some volatility is undesirable, as on agribusiness who, while waiting to harvestand sale, assumes currency exposures, as the price of their commodities, interestrates, etc..
For qualified institutions to dealwith the volatility as banks, investors and speculators volatility is desired, andoften through the mechanisms of high leverage so they can generate more return possibilities.
Controlling the Risk!
Financial risk can be measuredand mechanisms as well as the diversification of roles and help hedge in its control.The risk monitoring and simulation scenarios are indispensable tools for anyonewho has exposed to financial market operations.

Back to Featured Articles on Logo Paperblog