Question

How does the short-run volatility impact long-term decisions in this business model?

Answer 1

Answer)

Volatility is a key concept in business model. Volatility means uncertainty prevailing in the market conditions. Volatility can be measured in terms of standard deviation which shows dispersion around a fixed variable. Low standard deviation means less dispersion which implies less volatility and on the other hand more standard deviation implies more volatility which further implies greater risk involved in business investments. So, when volatility increases, risk increases and return decreases.

Volatility is also linked with price earning ratio ( P/E ). In periods of low inflation or stable market conditions, price -earning ratio tends to increase with lowering volatility in business conditions. We can conclude from this that as volatility increases , market performance tends to get better.