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 8/30/2010 the average price was 18.26 with a range of 0.37, indicating a Daily Volatility of 2%. The Daily Volatility is obtained by dividing the daily range by the daily average. A longer Volatility period such as Weekly Volatility is obtained by dividing the weekly price range by the weekly mean 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. 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. During 15 years, the Average Quarterly Volatility of IVZ stock price has been 34% while the Average Daily Volatility has been 3%. |
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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. From left to right, each position plots the Volatility associated with increasing intervals of time. However, as seen in this plot of the IVZ Volatility Curve, the increase is not constant. |
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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 IVZ : |
| Friday, September 03, 2010: We have news on Marshall & Ilsley Corporation, ticker symbol MI. A significant moving average event has happened. Also, there are breaking events concerning BioMarin Pharmaceutical Inc. and Nike Footwear. From the News Archive: (9/3/2010 ) Bad news came from The Allstate Corporation, AFLAC Incorporated, Freeport-McMoRan Copper & Gold Inc., and Nicor Inc.. |