Is interest rate volatility necessarily harmful?

It is frequently argued that increased interest rate volatility increases risk and thus, disrupts the saving-investment process. Using a mean-variance portfolio framework, this paper shows that increased interest rate volatility does not necessarily increase risk or reduce investor utility. The factors that determine whether heightened interest rate volatility increases or decreases investor risk and utility are derived and analyzed. Finally, evidence using variances, covariances and levels of asset returns is presented to provide insight into recent changes in interest rate volatility and associated changes in the risk borne and returns earned by investors.