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 8/27/2010 the average price was 37.32 with a range of 0.49, indicating a Daily Volatility of 1.3%. 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. Volatility, as measured through various intervals, ( Daily, Weekly, Monthly and Quarterly) is plotted according to color. 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 CPB has been 2% in contrast to the Average Quarterly Volatility of 19%. |
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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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A frequency distribution of the green points on the first chart (the daily volatility) yields this histogram. |
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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 CPB : |
| Friday, September 03, 2010: We have news on Mitsui & Company, Ltd., ticker symbol MITSY. A unfavorable momentum event has occurred. Also, there are breaking events concerning Panera Bread Company and Electronic Data Systems. From the News Archive: (9/3/2010 ) A favorable event happened at Apache. Meanwhile, bad news came from Hewlett Packard, Apartment Investment and Management Co., and Enersis S.A.. |