Volatility, drawdown, and liquidity risk
Three distinct dimensions often treated as one.
Volatility, drawdown, and liquidity risk
| Concept | Explanation | |---|---| | Volatility | How widely and rapidly prices vary. | | Drawdown | Decline from a prior peak to a later low. | | Liquidity risk | Risk that an asset cannot be sold quickly near the expected price. | | Gap risk | Risk that price jumps across levels without trading at intermediate prices. | | Tail risk | Risk of rare but severe outcomes. |
Volatility is not identical to permanent loss. A volatile asset may recover, while a low-volatility asset can still suffer permanent impairment. Drawdown and liquidity often matter more to an investor's ability to remain invested.