How to Calculate Annualized Volatility

By Lee Samaha – Updated Apr 30, 2025 at 10:20 PM

Key Points

Annualized volatility is calculated as standard deviation times square root of periods.
High annualized volatility indicates greater price variability and potential risk.
Investors use annualized volatility to compare risk and make informed choices.

Annualized volatility measures how much a stock price varies over one year. Many investors use volatility to define the riskiness of a stock, bond, or asset class. In addition, assumptions about volatility are used to price options.

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Yellow road sign warning Volatility Ahead against backdrop of beautiful blue sky. — Image source: Getty Images.

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No investor invests without comparing risk to reward, so annualized volatility is integral to any investor's toolbox. We'll outline how to calculate volatility and provide an example to serve as a reference point for readers interested in the concept.

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The above example is simplified to illustrate a point. However, in the real world, investors won't always have the time or patience to wait years to calculate potential returns and volatility.

That's where the idea of annualized volatility comes in. By annualizing short-term data, investors can know how volatile a stock will be over the course of a year just by using the data. In this case, I will illustrate the concept by examining the monthly returns on two U.S.-listed stocks.

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Chart showing monthly returns for two stocks. — Data source: author's analysis.

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The first step is to calculate the monthly volatility of each stock's return. You can easily do this using an Excel spreadsheet and calculating the standard deviation (stdev function) of the 12 monthly returns for each stock, as shown in the chart above.

Doing this gives a monthly standard deviation (volatility) of 17.9% for Stock A and just 3.6% for Stock B. This confirms the optics in the chart. In other words, Stock A is a more volatile -- and, some might say, riskier -- investment than Stock B.

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The bottom line on calculating annualized volatility

It's important to remember that annualized volatility is just one of many tools investors must consider. The history of investing is full of investment strategies that demonstrated low volatility and good returns -- right before they blew up in an investor's face.

In addition, the data is always historical, and there's no guarantee that stock returns will follow historical patterns. The assumption that volatility or standard deviation is equivalent to risk is also an open question.

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For example, going back to the first example above, Fund B is seen as riskier because its returns are more volatile than Fund A. However, the implied annual return is precisely the same at 10% for both funds. All told, volatility and annualized volatility are simply useful concepts that can serve as a starting point for thinking about risk and reward in investing.

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About the Author

Lee Samaha is a contributing Stock Market Analyst at The Motley Fool covering industrials, electricals, energy, materials, transportation, and infrastructure stocks. Prior to The Motley Fool, Lee was a Civil Engineer and Investment Manager. He holds a Bachelor of Civil and Structural Engineering from Southampton University and a Certificate in Investment Management from Chartered Institute for Securities & Investment. Lee first cut his investing teeth on The Motley Fool bulletin boards (commonly referred to as the “Fool Boards,”) and he’s infinitely grateful to all of the investors he learned from in this powerful investing community.

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