Volatility

Volatility measures how a price changes over a specified period of time. Volatility is measured in daily returns (percentage changes in prices).

The most commonly used measure of return volatility is standard deviation which measures the dispersion of returns. Standard deviation is one of the main characteristics of a normal distribution.

Volatility Formula

Volatility Formula

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Volatility Example

If stock X moves up 10% one year, and down 10% next year for the last 10 years, it has annualized volatility of 10%. Stock Y which moved 20% up and 20% down on alternating years for the last 10 years, it has volatility of 20%.

Even though both stocks end the 10 years unchanged from where they began, stock Y has twice the volatility of stock X. Stock X is considered superior investment because it has less risk in generating the same as stock Y.

Stock X volatility means that there is 95% probability (2 standard deviations) that the stock price iwll move between 10% and 30% on average annually.

Daily Returns can be calculated for stocks, bonds, commodities, currencies an investment portfolio volatility or a strategy.

Volatility calculated from past historical data and returns is also called historical volatility.

Return Volatility can be measured from weekly or monthly rates of returns but daily returns are the most precise.

Other volatility forms used in form are Actual Volatility and Implied Volatility.

Annualized Volatility is used to calculate investment performance metrics like Sharpe Ratio