Volatility measures indicate the amount of risk an investor assumes by holding a certain asset. Some assets, such as money market funds and government bonds, have extremely low volatility measurements. Others, such as mid- and small-cap mutual funds have relatively high volatility measurements, meaning they have a high risk of loss as well as reward. Using volatility measures information is a simple way for investors to manage their funds and devise both short- and long-term investment strategies.

Some investors need help with volatility measures, but many are capable of performing the necessary calculations themselves. Although mathematically rigorous risk analysis is challenging, most measures provide straightforward information that investors can use to make financial estimates and plan simple investment strategy. The following five measurements are both popular and widely used:

1. Standard deviation is the classic indicator of historical volatility.

2. Average True Range uses an asset's high and low performance to calculate its volatility.

3. Beta, alpha and R-squared are more advanced statistical volatility measures.

Action Steps
The best contacts and resources to help you get it done

Use standard deviation for simple volatility measures

According to Modern Portfolio Theory, or MPT, the simplest measure of an asset's volatility or risk is its standard deviation. By comparing an investment's average return to its fluctuation over a short period of time, the standard deviation gives investors a clear idea of its historical volatility. A fund or stock performing at an optimum level will yield maximum returns for minimum risk and will lie near or directly on the theoretical Efficient Frontier.

I recommend: Morningstar, one of the top online sources for investment news and research, offers a free fund screening tool that provides information on various mutual funds, including their standard deviations. The MSN Investment Toolbox is also a good source of relevant financial data.

Find volatility measures with an asset's Average True Range

An innovator in technical analysis, J. Welles Wilder introduced the Average True Range, or ATR in 1978. The concept behind true range is simple--by measuring the difference between an asset's high and low prices each day, an investor can get a basic idea of its volatility. Wilder then used an exponential moving average to calculate Average True Range. ATR is preferred by many investors over standard deviation because it accounts for the most recent market trends and can be used for many different kinds of assets.

I recommend: CFD Calculator offers a free ATR calculator that can save up to 10 days of price data and return ATR values instantly. If you need a tool to track your stocks' performance, check out the streaming real-time quotes from Yahoo! Finance.

Apply advanced statistical methods to employ specific volatility measures

Beta, alpha and R-squared are three statistical methods related to standard deviation that can also be used to calculate an investment's volatility. Beta compares an asset's risk to that of the market. R-Squared correlates an asset's performance or movement with that of the market. Alpha is unique from these two and measures how much an asset's increased risk helped it outperform its associated index or benchmark. All three values provide useful and distinct information on an asset's performance and can be used to measure volatility in addition to standard deviation and ATR.

I recommend: To understand an asset's beta, alpha and r-squared, you'll need its corresponding index or benchmark. For equity markets, check Standard & Poor’s S&P 500, which is sometimes regarded as a better indicator of movement than the Dow Jones Industrial Average. For fixed-income securities, check with the United States Department of Treasury. For a quick look at any stock's beta, try the low-beta screener from Yahoo! Finance.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  For volatility measures advice, consider hiring a volatility measures consultant. These groups often focus in a single sector or area of business and can provide detailed advice on managing risk.
• •  Consultants are also a good source for volatility measures training and can teach you and your employees more about the specific statistical methods used to calculate risk.