The term market volatility strategy refers to the approaches investors can take when the market is rising or falling in relatively short timeframes. Market volatility strategies start with the construction of investment portfolios that match the individual's risk profile.
A market, or industry, is said to be volatile when it is rising or falling in relatively short timeframes. Typically, statisticians will state volatility in terms of the standard deviation of an investment's return. The standard deviation measures the range of returns around the average; therefore, larger standard deviations mean more volatility. For example, the returns associated with the stock market will have a larger standard deviation than those of a money market fund.
While sudden increases in the value of a portfolio are welcomed by an investor, a sudden downturn can be worrisome. There are several ways to lower the risk of a portfolio; however, the most important step is to build one that matches the investor's risk tolerance score. Other strategies include: