Volatility isn't the same across instruments

"The greater the amount of capital we work with, the worse we're going to do, other things being equal, in terms of percentage returns on equity."

The greater the amount of capital we work with, the worse we're going to do, other things being equal, in terms of percentage returns on equity.

Volatility - a term the course returns to later, in the module on risk - measures how much an instrument's price swings: how much it swings varies enormously depending on whether you're looking at a stock, a bond, or a commodity, and that affects how much weight each instrument can carry in a portfolio.

Stocks are usually the most volatile instrument among those covered in the previous lesson: their price reflects expectations about future earnings, which can change quickly with a single earnings report or a piece of sector news. High-quality bonds swing much less, because most of their return is already fixed in advance by the agreed interest rate.

Volatility also varies within the same category: a mature company with stable revenue tends to swing less than a young company in an emerging sector, and a broad, diversified ETF swings less than the individual stocks it holds, because individual moves partly offset each other.

Higher volatility doesn't automatically mean a worse investment, just as lower volatility doesn't mean a genuinely safer investment in the sense of permanent capital loss: it just means that instrument's price requires a longer time horizon and more tolerance for short-term swings to be used profitably.