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 PepsiCo, defined to be the price range as a portion of the average price: So, to derive the Daily Volatility on 3/10/2010 of 0.9%, the price range for the day (0.58) was divided by the average price (64.3). 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. Investors often make a distinction between the concept of Volatility, and the concept of Risk. Academics define them to be exactly equivalent, but as can be seen here, there is good reason to distinguish between the levels of volatility or risk experienced across different time frames. During 30 years, the Average Quarterly Volatility of PEP stock price has been 18% while the Average Daily Volatility has been 2%. |
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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 PEP 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 PEP : |
| In the news, Thursday, March 18, 2010: An unfavorable condition has developed with AOL Time Warner, ticker symbol TWX. Also, there are breaking events concerning Dupont (DD) and Mylan Inc. (MYL) |