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 Martha Stewart, defined to be the price range as a portion of the average price: So, to derive the Daily Volatility on 6/26/2009 of 8.6%, the price range for the day (0.27) was divided by the average price (3.13). 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. 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. 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 MSO has been 5% in contrast to the Average Quarterly Volatility of 49%. |
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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. As the timespan across which Volatility is measured increases, the Volatility is expected to increase. However, as seen in this plot of the MSO 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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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 MSO : |
| In the news, Wednesday, July 01, 2009: An unfavorable condition has developed with Lexmark International, Inc., ticker symbol LXK. Also, there are breaking events concerning Lennar Corporation (LEN) and The Travelers Companies, Inc. (TRV) |