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 Southwest Bell Communications, defined to be the price range as a portion of the average price: So, to derive the Daily Volatility on 11/30/2005 of 2.1%, the price range for the day (0.55) was divided by the average price (25.07). 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. 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. During 21 years, the Average Quarterly Volatility of SBC stock price has been 19% while the Average Daily Volatility has been 2%. |
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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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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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Similarly, the purple points on the top chart, the Quarterly Volatility Values, are subjected to frequency distribution here. |
Refined Volatility Risk Analysis for SBC : |
| Wednesday, March 10, 2010: We have news on LoJack Corp, ticker symbol LOJN. A significant moving average event has happened. Also, there are breaking events concerning XTO Energy Inc. and American International Group, Inc.. From the News Archive: (3/9/2010 ) Bad news came from Titanium Metals Corporation, Exxon Mobil, Huntington Bancshares Incorporated, and Baxter International Inc.. |