c) Explain the meaning of market volatility in financial markets. (3 marks)
View Solution
Market volatility in financial markets is a measure of the extent to which the price of a financial security (such as a share’s market price), or a market as a whole, or an interest rate, or a currency, or a commodity changes over time.
High volatility means rapid and large changes in a price or rate over a short period of time. Low volatility means smaller and less frequent price changes.
Volatility refers to price movements in both directions, up and down. If prices move over time always in the same direction (either up or down, but not both) this does not mean high volatility. Volatility implies uncertainty about the way that prices will move next, and by how much.
High volatility creates high financial risk. Investors will want higher returns to invest in financial instruments where price volatility is high.
d) Explain the difference between a bull and bear market. (2 marks)
View Solution
In a bull market, prices on the whole move upwards continually over time. For example, in a bull stock market, share prices on the whole continue to rise over time.
In a bear market, prices on the whole move downwards continually over time. For example, in a bear stock market, share prices on the whole continue to fall over time.