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: For instance, on 3/18/2010 the average price was 5.42 with a range of 0.12, indicating a Daily Volatility of 2.2%. 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. 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. 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 50%. |
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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. As the timespan across which Volatility is measured increases, the Volatility is expected to increase. 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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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 MSO : |
| Friday, March 19, 2010: We have news on AT and T, ticker symbol T. A significant moving average event has happened. Also, there are breaking events concerning Goldman Sachs Group, Inc. and MicroSoft. From the News Archive: (3/18/2010 ) Favorable events happened at Martha Stewart and Zimmer Holdings, Inc.. Meanwhile, bad news came from Mylan Inc. and Patterson Companies, Inc.. |