Volatility vs. risk
Volatility and risk go hand in hand when you're deciding on an investment. Some of the most popular stock market metrics are used for both volatility and risk analysis.
"Beta" is a popular way to compare the volatility of an asset to the market. A beta of 1.0 means an asset's volatility is equal to the market's — both are just as likely to rise or fall in value. A beta below 1.0 means an asset is less volatile than the market, while and a beta above 1.0 means it's more volatile than the market.
A stock with a high beta (more volatile) is considered riskier; low-volatility stocks are usually less risky. Other popular measures of risk include alpha, r-squared and the Sharpe ratio.
Even so, volatility alone is rarely a reason to buy or sell. You have to look at the investment overall, including its risk, to make an educated decision.
In some cases, a longer investment "time horizon" can balance out the risk in a higher volatility portfolio. For example, if you have 10 years or more before you plan to tap your investments for retirement, you can ride out the market's ups and downs without too much worry. If you need those investments in the next year, however, you won't be able to wait for the market to recover from a drop.
Determine your ideal investment risk
Every investor has their own "risk tolerance," or how much risk they'll accept. If you get a queasy feeling when the stock market goes up and down, you may be best suited for a low-risk portfolio. However, if you have lots of assets and can afford to take on more risk, you could be rewarded with better portfolio performance and higher investment profits.
So, how are volatility and risk related in an investment? While they're not the same thing, they are closely related. Taking the time to understand your portfolio's risk and volatility is vital to optimizing your investments for your needs.