What is portfolio volatility?

Volatility measures how strongly an investment's returns fluctuate around their average. Statistically it is the standard deviation of the returns. A portfolio with a volatility of 5% moves in small, fairly predictable steps; one with 25% can swing by large amounts in either direction within a year. It is the most widely used single measure of investment risk, and the basis of many others, such as the Sharpe ratio.

The formula

Take the returns $r_1, r_2, \dots, r_n$ over $n$ equal periods — usually days — and their average $\bar{r}$ . The volatility per period is:

\sigma = \sqrt{\frac{1}{n - 1} \sum_{t=1}^{n} (r_t - \bar{r})^2}

Volatility is normally quoted per year. Because the variance of independent returns grows in proportion to time, the standard deviation grows with the square root of time:

\sigma_{\text{annual}} = \sigma_{\text{daily}} \times \sqrt{252}

where 252 is the usual number of trading days in a year. For monthly returns the factor is $\sqrt{12}$ .

A simple illustration

A portfolio has a daily volatility of 1%:

\sigma_{\text{annual}} = 1\% \times \sqrt{252} \approx 15.9\%

If returns were roughly normally distributed around an expected return of 7% a year, about two years in three would end between −9% and +23% (one standard deviation either side), and about 19 years in 20 between −25% and +39% (two standard deviations).

How to read it

Annual volatility	Typical of
under 5%	money market funds, short-term bonds
5–10%	mixed portfolios with a large share of bonds
15–20%	broad global equity portfolios
over 30%	single stocks, sector bets, crypto

Volatility is not loss. It measures swings in both directions: a portfolio that climbs steadily with occasional jumps upward still shows volatility.
Returns grow with time faster than the spread. Over one year, a 16% volatility dwarfs a 7% expected return. Over 20 years, the expected gain grows in proportion to time while the spread grows only with its square root, which is why the investment horizon matters so much.

What it misses

Fat tails. Real returns have more extreme days than the normal distribution suggests, so crashes happen more often than the bands above imply.
The order of returns. Two portfolios with the same volatility can have very different drawdowns, depending on whether the bad days come together or spread out.
Asymmetry. Investors mind falls far more than rises. The Sortino ratio and the maximum drawdown focus on the downside alone.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

How volatile is my portfolio?

Your portfolio's volatility at a glance:

Measure	Value
Annualized volatility (since inception)	18,18%
Daily volatility (std. dev.)	0,95%
Downside volatility	13,16%
Recent window — portfolio annualized volatility	8,17%

Top contributors to portfolio volatility (holding, weight, volatility p.a., contribution):

Asset	Weight (%)	Volatility p.a. (%)	Vol. contrib. (%)
Amazon.com Inc.	6,35%	29,02%	12,06%
Bitcoin	4,88%	36,07%	11,76%
Vanguard FTSE All-World UCITS ETF	13,95%	9,30%	11,75%
iShares Core S&P 500 UCITS ETF USD (Acc)	12,81%	9,28%	10,00%
iShares Core MSCI EM IMI UCITS ETF USD (Acc)	6,90%	17,51%	8,96%
Tesla Inc.	4,54%	35,05%	8,79%
ASML Holding N.V.	5,31%	33,15%	7,14%
NVIDIA Corp.	3,41%	28,57%	5,40%
Ethereum	1,62%	52,37%	5,27%
Microsoft Corp.	6,14%	23,67%	4,50%
iShares Core MSCI World UCITS ETF	9,11%	9,37%	4,39%
LVMH S.A.	2,99%	26,62%	2,94%
Allianz SE	6,35%	15,30%	2,68%
SAP SE	3,84%	30,29%	2,41%
Deutsche Lufthansa AG	2,77%	27,17%	1,45%
Coca Cola Co.	3,27%	15,55%	0,25%
Gold	0,00%	22,14%	0,00%

What this means in plain terms:

Volatility is the typical size of daily or annual swings in your portfolio value.
A volatility above 15% is usually considered high; your 18,18% shows where you stand on that scale.
The second table lists which holdings drove most of the recent volatility over the window 2025-09-12 to 2026-09-10.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

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