What does "volatility" refer to in financial markets?

Volatility refers to the degree of variation in price over time, which encompasses the frequency and magnitude of price moves in a market or asset. It is a key concept in finance, as it indicates the level of risk associated with a particular investment. Higher volatility means that the price of an asset can change dramatically in a short period, leading to potential for both substantial gains and losses. This variability helps investors assess the potential risk and reward of their investments.

In contrast, the other options describe different aspects of the market. The speed of price changes relates more to market liquidity and trading activity, while stability of an investment refers to how consistent and predictable returns are over time. The average price of a financial instrument is simply a measure of its price level, not a reflection of how much that price fluctuates. Therefore, understanding volatility as a measure of price variation is fundamental for evaluating investment risks and making decisions in financial markets.