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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This chart shows Volatility for Lennar Corporation, defined to be the price range as a portion of the average price: So, to derive the Daily Volatility on 2/19/2010 of 3%, the price range for the day (0.52) was divided by the average price (17.18). 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. The red plot shows the actual price. 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 23 years, the Average Quarterly Volatility of LEN stock price has been 31% 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. 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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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 LEN : |
| Wednesday, March 17, 2010: We have news on CIGNA Corporation, ticker symbol CI. Signs of an over-bought condition have become noticable. Also, there are breaking events concerning LoJack Corp and Procter and Gamble. From the News Archive: (3/17/2010 ) Bad news came from Prudential Financial, Inc., PPL Corporation, Patterson Companies, Inc., and General Electric. |