Chapter II: This survey looks at historical volatility of Wisconsin Energy Corporation prices. The risks associated with long and short term positions can be evaluated according to projected shapes of the Volatility Curve. |
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Volatility is defined as the price range for a period, divided by the average price for the period: So, to derive the Daily Volatility on 2/3/2010 of 1.3%, the price range for the day (0.67) was divided by the average price (49.25). 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. 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 26 years, the Average Quarterly Volatility of WEC stock price has been 14% 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. 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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Similarly, the purple points on the top chart, the Quarterly Volatility Values, are subjected to frequency distribution here. |
Refined Volatility Risk Analysis for WEC : |
| Monday, February 08, 2010: We have news on American International Group, Inc., ticker symbol AIG. Some signs of an over-sold condition have become evident. Also, there are breaking events concerning Archer-Daniels-Midland and Wells Fargo & Company. From the News Archive: (2/5/2010 ) Favorable events happened at Marathon Oil Corporation, Pactiv Corporation, and Range Resources Corp.. Meanwhile, bad news came from Genzyme Corporation. |