When we speak of the volatility of a financial asset, we refer to major variations in its price.
Volatility refers to the magnitude with which assets fluctuate. An asset that is not very volatile would therefore be one whose price fluctuates by only a little. Conversely, a highly volatile asset experiences very marked rises and falls.
A diversified portfolio would have some very volatile and some very safe assets, offering a continuous growth in its profitability, without the risk of suffering major losses.
Thus with the right diversification, in the medium term such a portfolio improves the ratio of its returns to the risk to which it is exposed.
