Chapter II: Understanding Price Volatility behaviour is essential to assessing the risk associated with positions across different time spans. |
| Prev. Co. | Next Co. | |
|
| ||
|
Volatility is defined as the price range for a period, divided by the average price for the period: For instance, on 2/17/2011 the average price was 27.14 with a range of 0.46, indicating a Daily Volatility of 1.6%. 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. 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 25 years, the Average Quarterly Volatility of MSFT stock price has been 26% while the Average Daily Volatility has been 3%. |
| Prev. Co. | Next Co. | |
| ||
|
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. |
| Prev. Co. | Next Co. | |
| ||
|
This histogram is a frequency distribution of Daily Volatility, corresponding to the green points on the first chart on this page. |
| Prev. Co. | Next Co. | |
| ||
|
Similarly, the purple points on the top chart, the Quarterly Volatility Values, are subjected to frequency distribution here. |
Refined Volatility Risk Analysis for MSFT : |
| Friday, February 18, 2011: We have news on Fiserv, Inc., ticker symbol FISV. Signs of an over-bought condition have become noticable. Also, there are breaking events concerning Zimmer Holdings, Inc. and D.R. Horton, Inc.. From the News Archive: (2/18/2011 ) Favorable events happened at Robert Half International Inc. and Southwestern Energy Company. Meanwhile, bad news came from McCormick & Company, Incorporated and Reynolds American, Inc.. |