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 12/29/2010 the average price was 25.61 with a range of 0.19, indicating a Daily Volatility of 0.7%. 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. 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 SEE has been 2% in contrast to the Average Quarterly Volatility of 25%. |
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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. 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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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 SEE : |
| 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 D.R. Horton, Inc.. From the News Archive: (2/18/2011 ) Favorable events happened at Robert Half International Inc. and Southwestern Energy Company. Meanwhile, bad news came from McCormick & Company, Incorporated and Reynolds American, Inc.. |