What is historical volatility a measure of?

Historical volatility is a measure that specifically quantifies how much an investment's price varies from its average price over a certain period. It reflects the degree of price fluctuations and provides insight into the stability or instability of the investment. A higher historical volatility indicates a greater range of price movements, meaning the investment's price deviates widely from its historical average, suggesting more uncertainty or risk associated with that investment. This measure is crucial for investors as it helps them assess the potential risk involved with an asset, enabling them to make informed decisions based on their risk tolerance.

While the average return on an investment, the overall market trend, and the risk of a security are related financial concepts, they are not directly represented by historical volatility. Historical volatility focuses specifically on price movement and does not communicate information about average returns or broader market trends.