Chapter II: Understanding Price Volatility behaviour is essential to assessing the risk associated with positions across different time spans. |
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This chart shows Volatility for MeadWestvaco Corp., defined to be the price range as a portion of the average price: So, to derive the Daily Volatility on 3/3/2010 of 3.3%, the price range for the day (0.82) was divided by the average price (24.46). 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. 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 MWV has been 3% in contrast to the Average Quarterly Volatility of 22%. |
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If you have ever seen a "yield curve" you should be able to understand the concept behind this "yield curve". 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 MWV 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 MWV : |
| Thursday, March 18, 2010: We have news on MicroSoft, ticker symbol MSFT. Signs of an over-bought condition have become noticable. Also, there are breaking events concerning Mylan Inc. and Patterson Companies, Inc.. From the News Archive: (3/17/2010 ) Favorable events happened at LoJack Corp and ACM Income Fund. Meanwhile, bad news came from LSI Corporation and Sempra Energy. |