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 6/30/2009 the average price was 24.93 with a range of 0.45, indicating a Daily Volatility of 1.8%. 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. During 26 years, the Average Quarterly Volatility of SGP stock price has been 22% while the Average Daily Volatility has been 3%. |
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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. 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 SGP : |
| Wednesday, July 01, 2009: We have news on Pitney Bowes Inc., ticker symbol PBI. A significant moving average event has happened. Also, there are breaking events concerning Public Service Enterprise Group Inc. and Pinnacle West Capital Corporation. From the News Archive: (7/1/2009 ) A favorable event happened at The Travelers Companies, Inc.. Meanwhile, bad news came from Fiserv, Inc., MeadWestvaco Corp., and Nicor Inc.. |