What does market volatility measure?

Market volatility specifically measures the degree of variation in trading prices over time. It reflects how much the price of a security or an index fluctuates over a given period. A higher level of volatility indicates a greater range of price movements, which can mean either larger gains or larger losses for investors.

This metric is important for understanding risk; investors often use volatility as a gauge of how much risk is involved in owning a particular asset. Typically, assets with high volatility are considered riskier because their prices can change dramatically in a short time, while assets with low volatility are deemed more stable.

The other options focus on different aspects of the market. The average price of stocks pertains to price levels rather than variations, total market capitalization refers to the overall market size without indicating how prices swing, and return on investment rates measure profit relative to investment without addressing price fluctuations. Thus, while all these concepts are vital in finance, they do not directly pertain to the measurement of market volatility.