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The Investment Assets Handbook: A definitive practical guide to asset classes by Yoram Lustig

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Chapter 15: Volatility

Volatility is most commonly measured by standard deviation. Standard deviation has a few shortcomings, such as assuming a normal distribution of returns, while many investments are not truly normally distributed; assuming no serial correlation in returns, while a number of investments do exhibit significant autocorrelation; and equally weighting downside and upside returns relative to the mean, while investors dislike only downside returns. Nevertheless, volatility is a common measure of risk.

Volatility tends to jump when equity markets fall. Figure 4.20 shows the cumulative performance of US equities since January 1940 and the rolling 36-month ex post realised annualised volatility. As can be seen, when equity markets ...

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