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 Williams Companies, Inc., defined to be the price range as a portion of the average price: For instance, on 2/26/2010 the average price was 21.63 with a range of 0.46, indicating a Daily Volatility of 2.1%. 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. The red plot shows the actual price. 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 28 years, the Average Quarterly Volatility of WMB stock price has been 30% while the Average Daily Volatility has been 3%. |
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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. From left to right, each position plots the Volatility associated with increasing intervals of time. However, as seen in this plot of the WMB 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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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 WMB : |
| In the news, Wednesday, March 10, 2010: An unfavorable condition has developed with Akamai Technologies, Inc., ticker symbol AKAM. Also, there are breaking events concerning XTO Energy Inc. (XTO) and American International Group, Inc. (AIG) |