How is duration related to volatility in an investment context?

Duration measures the sensitivity of a bond or fixed-income investment's price to changes in interest rates. It reflects how long it takes for an investor to be repaid through cash flows. In general, the longer the duration of an investment, the more sensitive it is to changes in interest rates, which means it will experience greater price fluctuations when interest rates change.

This relationship arises because longer-duration investments have cash flows that are spaced out over a longer period, making their present value more sensitive to interest rate fluctuations. When interest rates rise, the present value of these future cash flows declines more significantly for longer-duration investments compared to those with shorter durations. Consequently, longer-duration investments exhibit higher volatility, as their prices can swing more dramatically in response to market interest rate changes.

In contrast, investments with shorter durations tend to have lower volatility because their cash flows occur sooner and are therefore less impacted by interest rate movements. Thus, the correct answer highlights the inherent risk of long-duration investments in the context of interest rate changes and their associated price volatility in the market.