The Uses and Limits of Volatility

Market update 11th May 2020

It has been observed that new or novice investors look for a volatility in a stock. Along with trying to target the stock to buy at a lower price possible and sell it when it reaches its peak. Therefore, such stocks who are a lot volatile in the market are known as beta stocks. This stocks fluctuate to a high level and are favorite stocks of the day traders.

Another factor which the investors’ don’t take into consideration is the risk factor. Further, the calculation of risk factor is with respect to the returns. For instance, the Sharpe ratio wherein you measure excess return per unit of risk. Further you calculate risk is as volatility.

What is volatility in general?

Volatility is the ability to change rapidly and unpredictably. It is general termed in worse conditions but when it fluctuates the stock in the market. Subsequently, it means that the stock is changing in price rapidly due to various factors. It is the best experience which a market investor sees into his daily life.

Standard Deviation:

The annualized returns and the standard deviation theory helps us to generally assume that returns are in a normal bell shapes distribution. Further, normal distribution tell us that two thirds of time (68.3%), returns should fall within one standard deviation. Moreover, 95% of the time the returns should fall within two standard deviations.

Standard deviation basically tells you how strongly the price of stock is going to move around the moving average or mean. When the prices are tightly bunched together then the standard deviation is small. Further, if they spread apart then we have a relatively high standard deviation.

Factors that affect volatility:

A person needs to consider volitility from various micro or macro factors such as inflation, interest rates policies or changes in the inflation. There can be independent factors that can affect volatility such as change in oil prices affecting different sectors which might also affect the markets.

Impact of Volatility on the market:

Volatility helps to identify market bottoms. Aids also the long term investors to let them know about the stock’s performance at its high volatile state. However, this indicator doesn’t intended to time the exact top, but eventually volatility doesn’t reside in the market for a longer period. If the volatility increases, then the market’s performance will tend to decrease gradually.


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