Chapter II: Understanding Price Volatility behaviour is essential to assessing the risk associated with positions across different time spans. |
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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 3/4/2010 the average price was 34.33 with a range of 0.60, indicating a Daily Volatility of 1.7%. 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. 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. Average Daily Volatility over the history of DD has been 2% in contrast to the Average Quarterly Volatility of 20%. |
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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 DD : |
| Wednesday, March 10, 2010: We have news on Philip Morris, ticker symbol MO. Some signs of an over-sold condition have become evident. Also, there are breaking events concerning Omnicom Group Inc. and Vulcan Materials Company. From the News Archive: (3/10/2010 ) Bad news came from Carnival Corporation, PNC Financial Services, CenterPoint Energy, Inc., and NiSource Inc.. |