How to Measure Volatility?

The most simple definition of volatility may be a reflection of the degree to which price moves. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. A stock that maintains a comparatively stable price has low volatility. A highly volatile stock is inherently riskier, but that risk cuts both ways. When investing during a volatile security, the prospect for fulfillment is increased the maximum amount because the risk of failure. For this reason, many traders with a high-risk tolerance look to multiple measures of volatility to assist inform their trade strategies.

Standard deviation is that the commonest thanks to measure market volatility, and traders can use Bollinger Bands to research variance .

Maximum drawdown is differently to live stock price volatility, and it is employed by speculators, asset allocators, and growth investors to limit their losses.

Beta measures volatility relative to the stock exchange , and it are often wont to evaluate the relative risks of stocks or determine the diversification benefits of other asset classes.

The primary measure of volatility employed by traders and analysts is that the variance. This metric reflects the typical amount a stock’s price has differed from the mean over a period of your time. It is calculated by determining the mean price for the established period then subtracting this figure from each price point. The differences are then squared, summed, and averaged to produce the variance.

Because the variance is that the product of squares, it’s not within the original unit of measure. Since price is measured in dollars, a metric that uses dollars squared is not very easy to interpret. Therefore, the quality deviation is calculated by taking the root of the variance, which brings it back to an equivalent unit of measure because the underlying data set.