Financial Risk Manager Part 1
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Define volatility in the context of risk management.
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NNikitesh
A
The level of specific risk of an asset
B
The standard deviation of the return provided by the variable per unit time, when the return is expressed using continuous compounding
C
The standard deviation of returns on an asset per unit time
D
The variance of the return provided by the variable per unit time, when the return is expressed using continuous compounding
Explanation:
Volatility in risk management specifically refers to the standard deviation of returns per unit time when returns are expressed using continuous compounding. This is the precise definition used in financial modeling and option pricing. Option A is incorrect because it refers to specific risk rather than volatility. Option C is close but incomplete as it doesn't specify the continuous compounding aspect. Option D is incorrect because it refers to variance rather than standard deviation.
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