How does high volatility affect an investment's risk?

High volatility in an investment refers to the degree of variation in its price over a certain period. When prices fluctuate significantly, it indicates that the investment's future price is uncertain. This uncertainty inherently increases the risk associated with the investment.

The correct choice highlights that high volatility can lead to the potential for higher returns. In a volatile market, prices can swing dramatically, creating opportunities for investors to achieve substantial gains if they time their entry and exit points effectively. For instance, a stock that experiences large price swings offers investors the chance to buy low and sell high, thus maximizing returns on their investment.

While higher volatility indeed presents opportunities for increased returns, it simultaneously signifies greater risk, as the same price swings can also lead to significant losses. This concept is crucial for investors to understand: while the possibility for higher returns exists in volatile environments, the accompanying risks mean that careful analysis and strategy are required.