Volatility (Standard Deviation)
Volatility quantifies how much returns vary from their average. High volatility means returns swing wildly; low volatility indicates consistent, predictable returns.
What You Will Learn: You'll discover how Volatility (standard deviation) quantifies investment risk by measuring how much returns vary from their average. Learn how to interpret volatility levels, understand the 68-95-99 rule, and identify low-volatility investments that provide stable cash flows.
Definition
Volatility, measured by standard deviation, quantifies how much returns vary from their average. High volatility means returns swing wildly; low volatility indicates consistent, predictable returns.
Formula
Standard Deviation = √[Σ(Return - Average Return)² / N]In Plain English
Low Standard Deviation (3-5%)
- Returns cluster tightly around the average
- Most years look similar
- Predictable
High Standard Deviation (15-25%)
- Returns scatter widely
- Big gains and big losses
- Unpredictable
The 68-95-99 Rule
In a normal distribution:
- ~68% of returns fall within ±1 standard deviation of the mean
- ~95% within ±2 standard deviations
- ~99% within ±3 standard deviations
Why Volatility Matters
Risk Quantification
Universal language for measuring and comparing investment risk
Cash Flow Planning
Low volatility enables confident underwriting and distribution planning
Portfolio Construction
Combining low-correlation, low-volatility assets reduces overall risk
Emotional Discipline
High volatility tests investor resolve; low volatility enables buy-and-hold
Historical Volatility Across Property Types (2000-2024)
| Property Type | Std Dev | Assessment |
|---|---|---|
| MHC | 2.1% | Most stable—minimal year-to-year variation |
| Industrial | 4.8% | Stable but with recent acceleration |
| Multifamily | 5.2% | Moderate; sensitive to employment trends |
| Self-Storage | 6.8% | Highest volatility among core sectors |
| Office | 6.9% | Elevated post-2020; structural uncertainty |
| Retail | 7.5% | High from e-commerce disruption |
Insight: MHC's 2.1% standard deviation is less than one-third that of self-storage (6.8%). This stability stems from essential housing demand, 14-year average tenant tenure, and severe supply constraints.
Sources of Real Estate Volatility
- Market Cycles: Economic expansion and contraction drive occupancy and rent swings
- Interest Rate Changes: Cap rate expansion/compression affects valuations
- Supply Shocks: Rapid new construction can crater rents and occupancy
- Demand Disruption: Structural changes (remote work, e-commerce) alter space needs
Critical Distinction: Volatility vs. Risk
Volatility measures variation—both upside and downside. True risk is permanent capital loss. An asset with high volatility but no chance of catastrophic loss may be less risky than a low-volatility asset with hidden tail risks.
Where to Find This on Our Site
See Volatility analysis on our Research & Market Insights page, featuring:
- Risk-Return Profile charts showing volatility vs. returns
- Volatility comparisons across property types
- Risk-adjusted performance metrics and analysis
Related Terms
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