The standard deviation of returns, usually quoted per year. It rises with the square root of time when returns are independent.
Where you will meet it
Volatility comes up in 164 learning outcome notes across the FRM syllabus.
A few of them:
Fund Management FRM Part I · Financial markets and products
“Smoothed or stale valuations of illiquid assets understate volatility and correlation and overstate the Sharpe ratio.”
How Do Firms Manage Financial Risk? FRM Part I · Foundations of risk management
“Here σS and σF are the volatilities of spot and futures price changes.”
Common Univariate Random Variables FRM Part I · Quantitative analysis
“Mixing normals with the same mean but different volatilities gives a symmetric distribution with excess kurtosis, which is how regime-switching between calm and stressed markets produces fat tails.”
Measures of Financial Risk FRM Part I · Valuation and risk models
“Portfolio volatility is below the weighted average of the volatilities whenever the correlation is below 1, for a fully invested portfolio with positive weights summing to 1 and non-zero volatilities.”
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