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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Volatility is defined as the price range for a period, divided by the average price for the period: For instance, on 6/25/2009 the average price was 13.49 with a range of 0.38, indicating a Daily Volatility of 2.8%. 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. The remaining marks on the plot correspond to the Volatility measured across several time intervals. Investors often make a distinction between the concept of Volatility, and the concept of Risk. Academics define them to be exactly equivalent, but as can be seen here, there is good reason to distinguish between the levels of volatility or risk experienced across different time frames. During 25 years, the Average Quarterly Volatility of BGG stock price has been 22% while the Average Daily Volatility has been 2%. |
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You may be familiar with the "yield curve" which shows how interest bearing yields vary according to term. Each Volatility Curve is a snapshot in time. From left to right, each position plots the Volatility associated with increasing intervals of time. 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 BGG : |
| Wednesday, July 01, 2009: We have news on Public Service Enterprise Group Inc., ticker symbol PEG. Signs of an over-bought condition have become noticable. Also, there are breaking events concerning The Travelers Companies, Inc. and Kellogg Company. From the News Archive: (7/1/2009 ) Favorable events happened at Allegheny Energy, Inc., Bank of America Corporation, and American International Group, Inc.. Meanwhile, bad news came from Lexmark International, Inc.. |