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. |
| Prev. Co. | Next Co. | |
|
| ||
|
This chart shows Volatility for CIGNA Corporation, defined to be the price range as a portion of the average price: So, to derive the Daily Volatility on 7/28/2010 of 4.6%, the price range for the day (1.43) was divided by the average price (30.94). Daily Volatility (the daily range as a portion of the daily average price) is plotted in green. Blue is Weekly Volatility, which is the weekly range as a portion of the weekly average price. This is a different concept from the weekly average of daily volatility. For reference, the price is plotted in red. The remaining marks on the plot correspond to the Volatility measured across several time intervals. 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 28 years, the Average Quarterly Volatility of CI stock price has been 24% while the Average Daily Volatility has been 2%. |
| Prev. Co. | Next Co. | |
| ||
|
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. As the timespan across which Volatility is measured increases, the Volatility is expected to increase. However, as seen in this plot of the CI Volatility Curve, the increase is not constant. |
| Prev. Co. | Next Co. | |
| ||
|
A frequency distribution of the green points on the first chart (the daily volatility) yields this histogram. |
| Prev. Co. | Next Co. | |
| ||
|
Similarly, the purple points on the top chart, the Quarterly Volatility Values, are subjected to frequency distribution here. |
Refined Volatility Risk Analysis for CI : |
| Thursday, July 29, 2010: We have news on Automatic Data Processing, ticker symbol ADP. A significant moving average event has happened. Also, there are breaking events concerning St. Jude Medical, Inc. and W.W. Grainger, Inc.. From the News Archive: (7/28/2010 ) Favorable events happened at Cummins Inc. and Quest Diagnostics Incorporated. Meanwhile, bad news came from Harris Corporation and MetLife, Inc.. |