Final answer:
Volatility risk is the risk associated with the volatility of a stock, which includes the danger of rapid price changes. It plays a critical role in investment decisions, as stocks are subject to significant short-term fluctuations but tend to rise in the long term.
Step-by-step explanation:
Volatility risk refers to the risk associated with the volatility of a stock, meaning the risk of a stock's price changing rapidly. This kind of risk is particularly important for investors to consider, as it can affect the predictability and stability of returns on their investments. Stocks are known for having high volatility risk in the short term, displaying significant price fluctuations in response to market forces and news that may alter company valuations.
For investors, understanding volatility risk is key to developing a strong investment strategy, especially when future stock prices follow a "random walk with a trend," which implies that they are unpredictable on a day-to-day basis but tend to increase over the long term. This unpredictability can provide high returns over time but also presents high risks. Considering one's life stage and investment timeline is essential when making decisions that involve volatility risk.