What does the term 'volatility' refer to in finance?

Volatility in finance is primarily understood as the variation in the price of a financial asset over a specific period. It reflects how much the price of an asset fluctuates—higher volatility indicates that the asset's price can change dramatically in a short time, while lower volatility signifies more stable prices. This concept is crucial for investors as it helps in assessing the risk associated with investments.

As volatility increases, the potential for both higher returns and increased losses also escalates, making it a key factor in portfolio management and risk assessment. Investors who are more risk-averse might prefer assets with lower volatility, while those who seek higher returns may invest in more volatile assets.

The other options touch upon different aspects of finance but do not encapsulate the specific meaning of volatility. For instance, the risk associated with interest rates pertains to interest rate risk, which is different from price volatility. Changes in regulatory policies relate to the operational environment of financial markets, and the stability of market trends does not inherently capture the concept of price fluctuations in individual assets.