Volatility is defined as the price range for a period, divided by the average price for the period:
So, to derive the Daily Volatility on 12/2/2005 of 1.7%, the price range for the day (0.05) was divided by the average price (2.84). 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.
The red plot shows the actual price. Volatility, as measured through various intervals, ( Daily, Weekly, Monthly and Quarterly) is plotted according to color.
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. Average Daily Volatility over the history of LU has been 5% in contrast to the Average Quarterly Volatility of 47%.
|
