What is meant by volatility in investments?

Volatility in investments refers specifically to the likelihood that the price of a particular asset will experience significant fluctuations over a short period. This measure of risk indicates the degree of variation in price movements, demonstrating how much the investment's value can rise or fall sharply.

Understanding volatility is critical for investors because it helps them assess the potential risk associated with their investments. High volatility usually suggests that the investment could yield substantial profits, but it also carries a greater risk of losing value quickly, which could be unsettling for risk-averse individuals.

In contrast, the other options focus on different aspects of investment performance. For instance, consistent returns refer to stable performance over time, while average return pertains to the mean earnings generated by an investment, and total potential profit reflects the maximum expected gain without consideration of risk or price fluctuations. None of these options accurately captures the essence of volatility, which is inherently tied to the unpredictability of price movements.