Volatility: A dead ringer for downside risk

• Volatility is as widely used as is widely criticized as a risk metric; this short article argues that despite its many shortcomings volatility is pervasive for two mutually-reinforcing reasons. • First reason, volatility is very widely known; second reason, volatility is a very good proxy for the downside risk that investors really dislike. • A ranking of assets by volatility is very highly correlated with rankings made by different metrics that directly assess downside risk. • This article is not a defense of volatility as a measure of risk; rather, it seeks to answer the question of why volatility is so pervasive in finance. Volatility is as widely used as is widely criticized as a risk metric. This short article argues that despite its many shortcomings volatility is pervasive for two mutually-reinforcing reasons: First, it is very widely known; and second, it is a very good proxy for the downside risk that investors really dislike. The evidence discussed here shows that a ranking of assets by volatility is very highly correlated with rankings made by different metrics that directly assess downside risk.