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You are to estimate a stock’s annualized volatility using its prices in the past 5 months....

  1. You are to estimate a stock’s annualized volatility using its prices in the past 5 months.

Month

Price

1

100

2

110

3

112

4

105

5

113

Find the historical volatility for this stock.

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Answer #1

Volatility of stock is the dispersion of stock prices from mean prices. We calcuate volitality using standard deviation.

Standard Deviation = Square Root of (Sum of Square of deviations/ No of observations)

Month Price Square of Deviation
1 100 64
2 110 4
3 112 16
4 105 9
5 113 25
Total 540 118
Average 108

Standard Deviation (monhtly) = Square Root (118 / 5) = 4.8579

Annualised Standard Deviation = Monthly Standard Deviation * Square Root 12

= 16.83

Stocks annualised volatility is 16.83

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