What does "volatility" indicate about an investment?

Volatility refers to the degree of variation of a trading price series over time, which essentially describes how much the price of a financial instrument fluctuates. High volatility means the price can change dramatically in a short period of time, indicating that the investment can experience significant price movements either up or down. This characteristic of volatility is essential for investors as it provides insight into the risk associated with an investment; higher volatility typically suggests a higher level of risk since the potential for loss or gain is greater.

In contrast, the other choices address different aspects of investing. Price stability relates to how consistent the price of an asset remains over time, while the average return speaks to the performance of an investment over a longer horizon rather than its price changes. Liquidity refers to how easily an investment can be bought or sold in the market without affecting its price, which is a different concept altogether. Understanding volatility helps investors gauge risk levels and make informed decisions aligned with their investment strategies.