Chapter II: Risks associated with short and long period price changes can be understood through Volatility Analysis. Here the impact of the Volatility Curve on the potential profitability positions across different time spans is shown. |
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This chart shows Volatility for Applied Materials, defined to be the price range as a portion of the average price: So, to derive the Daily Volatility on 3/12/2010 of 2%, the price range for the day (0.25) was divided by the average price (12.43). The Daily Volatility is obtained by dividing the daily range by the daily average. A longer Volatility period such as Weekly Volatility is obtained by dividing the weekly price range by the weekly mean price. This is a different concept from the weekly average of daily volatility. The red plot shows the actual price. Volatility, as measured through various intervals, ( Daily, Weekly, Monthly and Quarterly) is plotted according to color. According to academic theory, Volatility is exactly equal to Risk. But investors often make a distinction between these two concepts. The different character of Volatility as seen in different time frames, lends some support to the investor's view. During 26 years, the Average Quarterly Volatility of AMAT stock price has been 38% while the Average Daily Volatility has been 4%. |
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If you have ever seen a "yield curve" you should be able to understand the concept behind this "yield curve". Each Volatility Curve is a snapshot in time. As the timespan across which Volatility is measured increases, the Volatility is expected to increase. The relationship between the length of time, and the expected change in price, is not linear, as is demonstrated by this chart. |
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This histogram is a frequency distribution of Daily Volatility, corresponding to the green points on the first chart on this page. |
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Similarly, the purple points on the top chart, the Quarterly Volatility Values, are subjected to frequency distribution here. |
Refined Volatility Risk Analysis for AMAT : |
| Wednesday, March 17, 2010: We have news on CIGNA Corporation, ticker symbol CI. Signs of an over-bought condition have become noticable. Also, there are breaking events concerning Prudential Financial, Inc. and Patterson Companies, Inc.. From the News Archive: (3/17/2010 ) Favorable events happened at LoJack Corp and Harley-Davidson, Inc.. Meanwhile, bad news came from General Electric and Nucor Corporation. |