Stock Market Volatility: What it is & How to Measure it The Motley Fool

Up to this point, we have learned how to examine figures measuring risk posed by volatility, but how do we measure the extra return rewarded to you for taking on the risk posed by factors other than market volatility? Enter alpha, which measures how much if any of this extra risk helped the fund outperform its corresponding benchmark. Using beta, alpha’s computation compares the fund’s performance to that of the benchmark’s risk-adjusted returns and establishes if the fund outperformed the market, given the same amount of risk.

  1. When searching for
    such securities most investors will also include the stocks Beta as a
    criterion in determining low volatility.
  2. In addition, General Mills rewards investors with a dividend that has been paid for more than a century, that was improved by 4.1% in September and that currently yields more than 3%.
  3. But no matter what the economy is doing, you need to brush your teeth, and you need to wipe your … well, you get where we’re going with this.

These are collections of assets that have been constructed with the goal of minimizing volatility. Investing in farmland can be a way to diversify your portfolio and reduce volatility. Farmland is a real asset, which means it’s not as prone to the same type of price swings that you see with stocks and other financial assets. In this analogy, a minimum volatility strategy would look more like the second trail — less risky and designed to be more stable. A min vol portfolio can help investors navigate the risks of big fluctuations in the market.

The company is a Dividend King that has generated 54 consecutive years of dividend growth. Hormel’s dividend improved by 11% last November and 13% annually over the last five years. Kellogg’s portfolio of meatless products, marketed under the Morningstar Farms brand, has been a growth driver, too. Kellogg already has the No. 1 veggie burger in the U.S. and plans to transition its entire Morningstar Farms portfolio to 100% vegan by 2021.

What Is Considered Average Stock Volatility?

When comparing securities, understand the underlying prices as dollar maximum drawdowns may not be a fair comparable base. Bollinger Bands are often used as an indicator of the range a security trades between, with the upper band limit indicating a potentially high price to sell at, and the lower band limit indicating a potential low price to buy at. The most simple definition of volatility is a reflection of the degree to which price moves. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. The advantages of CDs are that they are low-risk and relatively easy to understand. The main downside is that they tend to have lower interest rates than other types of investments.

Low Volatility Everywhere

Volatility is just noise when you allow your investments to compound long into the future. Shares of a blue-chip company may not make very big price swings, while shares of a high-flying tech stock may do so often. That blue-chip stock is considered to have low volatility, while the tech stock has high volatility.

Best Low-Volatility Stocks to Buy

Meanwhile, Entergy makes this list of the best low-volatility stocks by merit of its subdued betas, which imply ETR shares have been roughly 40% less volatile than the broader market over the short- and medium-term. The dividend is a nice sweetener, too – at 4.5%, it clobbers the S&P 500 and is well higher than most utility-sector exchange-traded funds. For investors who are more risk averse, buying and holding low
volatility securities in their portfolios can help them mitigate the
uncertainty that results when the market corrects or shifts. Instead
of investing in fixed income securities that generate lower returns,
investors can use low volatility securities to benefit from the
potential higher returns that equities can provide. Typically, these are companies that have a track record of steady
financial performance and therefore a lower likelihood of experiencing
significant fluctuations in the value of their stock. They are also
companies that often have lower debt and a more predictable business
model, which makes them less risky investments.

Pros and cons of low-volatility ETFs

Min vol has persistently lowered risk in portfolios when compared to the broad market. Finally, any investor should invest in a level of market volatility that they are comfortable with. Financial advisors should provide options that match expected returns per unit of risk. The markets provide investors with higher\lower returns with increased volatility.

SPLV is a bit more selective than some of the other low vol ETF options on this list. The fund limits its portfolio to only large domestic stocks that are part of the S&P 500 Index, then picks the top 100 names off that list that have the lowest realized volatility over the past year. However, it’s important to know that while these funds can often reduce overall volatility over longer time periods, they still can suffer mightily against sudden market shocks. The simple fact that they’re meant to reduce volatility doesn’t mean they’re immune. Indeed, there are still plenty of unanswered questions for investors, including those surrounding the Federal Reserve’s future monetary plans, geopolitical uncertainty and the upcoming U.S. presidential election. The concept of low volatility investing is based on cushioning the potential damage of a sudden market downturn.

The content of this Web site is provided for general information purposes and should not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice in any way. In addition, the information presented on this Web site, whether financial, fiscal or regulatory, may not be valid outside the province of Quebec. Alpha is calculated using beta, so if the R-squared value of a fund is low, it is also wise not to what is mirror trading trust the figure given for alpha. CFA Institute is the global, not-for-profit association of investment professionals that awards the CFA® and CIPM® designations. We promote the highest ethical standards and offer a range of educational opportunities online and around the world. CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor.

If you’re looking for an investment that has low volatility and the potential for high returns, you should consider investing in real estate. Real estate crowdfunding platform Fundrise makes it easy for investors to get started with as little as $10. These are just a few of the low volatility ETFs and mutual funds available.

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A veteran journalist with extensive capital markets experience, Jeff has written about Wall Street and investing since 2008. His work has appeared in numerous respected finance outlets, including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today and CNN Money. “Mid caps tend to exhibit the staying power of larger businesses but may still have substantial growth opportunities ahead.” These two sectors are struggling to start the new year, too, and neither has particularly good long-term growth prospects, especially when compared with more dynamic consumer or tech stocks. But if you’re looking for stability and income, this fund could be worth considering.

GIS shares, which by beta are the most stable of these 12 low-volatility stocks, are valued at just 16 times earnings estimates and a 7% discount to their historical average forward P/E. In addition, General Mills rewards investors with a dividend that has been paid for more than a century, that was improved by 4.1% in September and that currently yields more than 3%. Low-volatility strategies are designed to limit losses during periods of market decline while still allowing for upside.

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