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 MicroSoft, defined to be the price range as a portion of the average price: For instance, on 2/5/2010 the average price was 27.93 with a range of 0.71, indicating a Daily Volatility of 2.5%. 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. 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. Average Daily Volatility over the history of MSFT has been 3% in contrast to the Average Quarterly Volatility of 27%. |
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You may be familiar with the "yield curve" which shows how interest bearing yields vary according to term. These Volatility Curves each apply to a discrete time interval. From left to right, each position plots the Volatility associated with increasing intervals of time. However, as seen in this plot of the MSFT Volatility Curve, the increase is not constant. |
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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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Similarly, the purple points on the top chart, the Quarterly Volatility Values, are subjected to frequency distribution here. |
Refined Volatility Risk Analysis for MSFT : |
| In the news, Monday, February 08, 2010: A favorable condition has developed with Nicor Inc., ticker symbol GAS. Also, there are breaking events concerning American International Group, Inc. (AIG) and United Technologies (UTX) |