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: So, to derive the Daily Volatility on 2/4/2010 of 1.3%, the price range for the day (0.23) was divided by the average price (16.51). 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. Average Daily Volatility over the history of BGG has been 2% in contrast to the Average Quarterly Volatility of 23%. |
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If you have ever seen a "yield curve" you should be able to understand the concept behind this "yield curve". These Volatility Curves each apply to a discrete time interval. From left to right, each position plots the Volatility associated with increasing intervals of time. However, as seen in this plot of the BGG Volatility Curve, the increase is not constant. |
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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 : |
| Thursday, February 04, 2010: We have news on MicroSoft, ticker symbol MSFT. Some signs of an over-sold condition have become evident. Also, there are breaking events concerning Polo Ralph Lauren Corporation and Eastman Kodak. From the News Archive: (2/3/2010 ) Favorable events happened at C.H. Robinson Worldwide, Inc., PNC Financial Services, and Briggs and Stratton. Meanwhile, bad news came from Northrop Grumman Corporation. |