Chapter II: This survey looks at historical volatility of Electronic Data Systems prices. The risks associated with long and short term positions can be evaluated according to projected shapes of the Volatility Curve. |
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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 2/5/2010 the average price was 9.09 with a range of 0.58, indicating a Daily Volatility of 6.3%. 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. It is important to avoid confusing this with the weekly average of the daily volatility, which is a completely different concept. For reference, the price is plotted in red. 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. During 3 years, the Average Quarterly Volatility of EDS stock price has been 14% while the Average Daily Volatility has been 1%. |
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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. 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 EDS : |
| Monday, February 08, 2010: We have news on American International Group, Inc., ticker symbol AIG. Some signs of an over-sold condition have become evident. Also, there are breaking events concerning Nicor Inc. and Wells Fargo & Company. From the News Archive: (2/5/2010 ) Favorable events happened at Pactiv Corporation, Marathon Oil Corporation, and Regions Financial Corporation. Meanwhile, bad news came from Genzyme Corporation. |