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 12/2/2005 the average price was 4.95 with a range of 0.10, indicating a Daily Volatility of 2%. 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. 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 14 years, the Average Quarterly Volatility of IDNX stock price has been 53% while the Average Daily Volatility has been 6%. |
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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. From left to right, each position plots the Volatility associated with increasing intervals of time. 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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In a similar vein, the Frequency Distribution of the Quarterly Volatility is plotted here. This is the distribution of the values plotted in purple on the top chart from this page. |
Refined Volatility Risk Analysis for IDNX : |
| In the news, Friday, February 18, 2011: An unfavorable condition has developed with Aetna Inc., ticker symbol AET. Also, there are breaking events concerning Dollar Tree, Inc. (DLTR) and First Niagara Financial Group Inc. (FNFG) |