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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Volatility is defined as the price range for a period, divided by the average price for the period: For instance, on 1/6/2011 the average price was 31.08 with a range of 0.25, indicating a Daily Volatility of 0.8%. 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. Average Daily Volatility over the history of PDCO has been 3% in contrast to the Average Quarterly Volatility of 24%. |
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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. 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. |
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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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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 PDCO : |
| 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 McCormick & Company, Incorporated. From the News Archive: (2/18/2011 ) Bad news came from Reynolds American, Inc., Dollar Tree, Inc., Zimmer Holdings, Inc., and NVIDIA Corp. |