What Is Volatility?

Volatility measures how much a fund's price — that is, its unit share price — fluctuates over time. If the price rises and falls sharply from day to day, the fund is high-volatility; if it moves in small steps and stays steady for long stretches, it is low-volatility. Volatility does not indicate direction — it describes not whether the price went up or down, but how widely it swung around its average.

How is volatility measured?

The standard measure of volatility is the standard deviation of the fund's periodic returns. Step by step:

• Returns are computed over a set interval (for example, each day). In practice logarithmic (continuous) returns are often used, because their compounding behaves more cleanly.
• The average squared deviation of these returns from their mean is taken; its square root is the standard deviation.
• The result is the volatility for that interval (daily volatility if computed from daily returns). Standard deviation is preferred because it weighs upward and downward deviations equally and summarizes the spread around the average in a single number.

To convert a daily figure into annual volatility, you annualize: the standard deviation is multiplied by the square root of the number of trading days/periods in a year. For daily data this factor is roughly the square root of the number of trading days — this site uses √252 (≈ 15.87); for weekly data √52, for monthly √12. The square root appears because variance (the square of standard deviation) grows linearly with time, so volatility scales with the square root of time. This puts different funds' — and different sampling frequencies' — volatilities on a common annual scale for comparison. The same fund's 1-year and 3-year volatility can be computed separately; the longer the window, the smaller the effect of any single unusual day.

High versus low volatility: not a quality judgment

The most common misconception is to treat low volatility automatically as "safer" or "better." Volatility is a neutral, descriptive measure:

• High volatility means both sharp drops and sharp rises are more likely. For a long-horizon saver who can tolerate swings, that may not be a problem.
• Low volatility means the price stays steady; but a fund that loses value in real terms against inflation can also be "low-volatility." Steadiness is no guarantee of a gain or of preserving principal.

Which level of volatility suits a person is a personal question about horizon, purpose and tolerance for swings. This page does not say which level should be preferred; it only explains what the concept measures.

How the risk value (1-7) is derived from volatility

On TEFAS and in fund information documents, every fund carries a risk value: a number from 1 (lowest) to 7 (highest). This number is not an opinion; it is computed by mapping the fund's historical return volatility onto seven bands. The logic: the fund's annualized return standard deviation is measured, then placed in the band whose range it falls into, as below.

The SPK's Guide on Investment Funds (section 9.3.2) bases the band on the annualized volatility of the fund's weekly returns: if that volatility is below 2% the fund takes 1, and if it is 30% or above it takes 7. The values in between fall on bands that rise as volatility increases; the exact edges of the intermediate bands are defined in the Guide.

The higher the volatility, the larger the risk number. That is why a money market fund usually sits at the low end of the scale and an equity-heavy fund at the top. The risk value compresses volatility into a single integer; in doing so it does not capture other dimensions of risk such as maximum drawdown or liquidity.

Volatility, maximum drawdown and Sharpe: different questions

Volatility is not the only measure of risk, and on its own it is incomplete. Two measures alongside it answer entirely different questions:

• Maximum drawdown — the largest loss a fund suffered from a peak down to the following trough. It answers "how far did it fall in the worst case," whereas volatility measures average fluctuation, not the worst moment.
• Sharpe ratio — how much return was earned per unit of volatility, relative to a risk-free return. It asks "how much return came in exchange for the swings taken on."

Reading all three together gives a far more complete picture than looking at any single number. To view different funds' volatility side by side, you can use the /fon-karsilastirma and /en-cok-kazandiran-fonlar pages; these pages offer no recommendation, they only display the measures.