Stock volatility is a numerical indicator of the price of a specific stock.Stock volatility is often misconstrued.Some think it means risk in owning a company's stock.Some think it means uncertainty in owning a stock.The case is not the case.It's an important measure of how desirable a stock is for investors to own based on their appetite for risk and reward.How to calculate stock volatility.
Step 1: Determine the period in which to measure returns.
The period is when the stock price changes.This can be daily, monthly, or yearly.The majority of the time, daily periods are used.
Step 2: You can choose a number of periods.
The number of periods is how many times you will be measuring within a calculation.The average number of trading days in a month is 21.A small value wouldn't give you good results.The bigger the value, the easier your result becomes.You can use 63 periods to represent the number of trading days in a three months or a year.
Step 3: Search closing price information.
The closing prices of the stock at the end of your periods are what you will use to calculate volatility.The closing price is what it would be for daily periods.Market data can be downloaded from websites like Yahoo!MarketWatch and Finance.
Step 4: You have to calculate returns.
Natural log is the closing price of a stock at the end of the period divided by the previous period's price.Rn is the return of a given stock over the period, ln is a natural log function, and C is at the end of the time period.The natural log key is simply "ln" and must be pressed after the rest of the equation has been calculated.If you wanted to find the returns when the price closed on one day at $11 and had closed at $10 the day before, you would set up your equation as Rn.This would make it simpler to Rn.The result is 0.0953 if you press the ln key.The natural log is used to convert the numerical change in value of the stock over the period to an approximation of percent change between days.
Step 5: Find the return.
Add all of your returns together.To find the mean return, divide the number of returns you are using by n.The average return is the time period you are measuring.The mean, m, is calculated as follows.For example, imagine that you had 5 periods that had calculated returns of 0.2, 0.1, -0.3, 0.4, and 0.1.You would divide the number of periods by 5 to get 0.3.Your mean would be either 0.2 or 0.06.
Step 6: The deviations from the mean are calculated.
The deviation, Dn, from the mean return, m, can be found for every return.The equation for finding Dn can be expressed as Rn-m.All returns within the range you are measuring need to be calculated.If you used the previous example, you would subtract your mean from each of the returns to get a deviation for each.D1 is 0, D2 is 0.14, D3 is 0.26, D4 is 0.36, and D5 is 0.04.
Step 7: Find the discrepancy.
The next step is to calculate the squared individual deviations from the mean of the returns.The equation can be used to find the variance, S.Again, sum the squares of the deviations, Dn, and divide by the total number of variances minus 1, n-1, to get the mean variance.Take your deviations from the last step.In order, these would be: 0.0196, 0.0256, 0.1296, and 0.1156.The numbers should be combined to get 0.292.Divide by n-1, which is four, to get 0.073.There is an example.
Step 8: The volatility should be calculated.
The square root of the variance is the volatility.The square root is the deviation of a set of returns from their mean.The root mean square is the deviation from the mean return.The standard deviation of the returns is called it.The square root of S is 0.073.So, V.270.The number has been rounded to three.To be more accurate, you may want to keep more decimals.A stock that has a wide variation in returns will have a large volatility compared to a stock with a small variation.For money in a bank account with a fixed interest rate, every return is equal to the mean and the volatility is zero.
Step 9: You need to set up your spreadsheet.
Calculating volatility in spreadsheets is much simpler than it is by hand.You can start by opening a blank sheet of paper.
Step 10: Information about the market.
You should import the closing prices for the stock you are measuring.The oldest price and the most recent price should be input vertically in the A column.Cells A1-A21 hold 21 days' worth of prices.
Step 11: Interday returns are calculated.
Interday returns are the difference between the closing prices of days.The cells next to the closing prices will hold the results of this calculation.Enter the formula in cell B2 to calculate the returns.The percent changes between the first and second day of your range will be calculated.The formula should be dragged down the rest of the range to the final price.The list of interday returns should be in column B.
Step 12: The standard deviation function is used.
The standard deviation function can be used to calculate volatility.It doesn't matter where, as long as it's empty, enter the following function in a nearby cell.You can fill in the parentheses with your interday return data.For example, if your data is contained in cells B2 to B21, enter:The parentheses should be closed.The volatility of the stock will be given by pressing enter on the cell containing this function.