What is meant by 'volatility' in financial markets?

Volatility in financial markets refers to the degree of variation in a trading price series over time, which is fundamentally evaluated through the changes in a security's value. It is essentially a measure of the uncertainty or risk that is associated with the extent of price fluctuations in an asset or security. The higher the volatility, the greater the price swings, which indicate a higher degree of risk and uncertainty about the future performance of that asset.

Investors use volatility as a key indicator to assess potential risks; assets that are highly volatile may offer the possibility of high returns, but also come with a significant risk of loss. It is particularly important for traders and investors who need to manage their portfolios and tailor their strategies based on expected price movements.

In contrast, the other options incorrectly describe volatility. The first option suggests volatility is a measure of overall return, which refers more to the expected profitability rather than the unpredictability in price changes. The third option implies that volatility is associated with stable investments, which is inherently contradictory since stable investments would exhibit low volatility. The fourth option discusses dividends, which are related to cash distributions to shareholders rather than price fluctuations.