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: So, to derive the Daily Volatility on 2/8/2011 of 2.1%, the price range for the day (1.14) was divided by the average price (53.28). 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. Volatility, as measured through various intervals, ( Daily, Weekly, Monthly and Quarterly) is plotted according to color. 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 19 years, the Average Quarterly Volatility of WFMI stock price has been 34% while the Average Daily Volatility has been 4%. |
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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. However, as seen in this plot of the WFMI 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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Similarly, the purple points on the top chart, the Quarterly Volatility Values, are subjected to frequency distribution here. |
Refined Volatility Risk Analysis for WFMI : |
| In the news, Friday, February 18, 2011: An unfavorable condition has developed with Aetna Inc., ticker symbol AET. Also, there are breaking events concerning Dollar Tree, Inc. (DLTR) and First Niagara Financial Group Inc. (FNFG) |