Volatility
A statistical measure of the dispersion of returns for a given security or market index, typically measured using standard deviation or variance. Higher volatility induces volatility drag and asymmetric drawdowns, where recovering from losses requires non-linear percentage gains. Higher volatility reduces compound (geometric) return even when the average return is unchanged.
Systems Engineering Analogy
Jitter or variance in a network stream: high dispersion creates turbulence; higher volatility reduces compound geometric throughput.
Mathematical SpecificationDeterministic
R_{recovery} = L / (1 - L)Variables:
L:Portfolio drawdown or loss fraction (e.g., 0.50 for 50%)
1 - L:Remaining capital ratio operating in future compounding cycles
R_{recovery}:Percentage gain required on remaining capital to recover to original parity
Worked Example Scenario
A 50% drawdown requires a 100% gain to recover parity (0.50 / (1 - 0.50) = 1.00 = +100%). An 80% loss requires a 400% gain.
Featured in: Book 09: Risk, Configured
Read complete guide