Volatility is calculated as the annualised standard deviation of the daily price change for the 200 most recent trading days. Suppose we have 2 batsmen, A and B. Scores of A and B in the previous 5 matches are as below:
As can be seen, both players have on an average scored about 40 runs per match in the previous 5 matches. However average score does not allow us to understand who amongst the 2 players is more consistent. This can be understood by studying the difference between individual scores and the average score of each player. Standard deviation is a measure of how far each number is from the average. The closer the numbers are to the average, the more consistent the batting performance is.
We have calculated the standard deviation with the help of excel. As can be seen player B, has slightly lower average than A. However his standard deviation is significantly lower than that of A, indicating more consistent performance and hence lesser risk of not performing. In the case of stocks we define volatility as riskiness of the stock and is measured using standard deviation. Higher the standard deviation, greater the volatility and vice versa.