How to Calculate Volatility
Volatility, in the financial world, refers to the level of risk for a given security. Specifically, historical volatility, which is also known as statistical volatility, measures volatility by looking at historical price changes. It is based on actual, recent prices. It can also be thought of as the rate of change or "speed" of the stock. The higher the historical volatility, the more movement the stock has experienced over the time period calculated. Volatility is heavily used by options traders, as it helps to determine whether an option is likely to expire in or out of the money.
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Instructions
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Look up the prices for X stock over a 10-day period. You can look up historical stock prices on the Internet at sites such as Yahoo! Finance. For the purpose of this example, let's say that we are looking up a stock with a price of $5 on Day 1, $6 on Day 2, $7 on Day 3 and so on, up to $14 on Day 10.
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Open a spreadsheet. Put your dates in Column A and stock prices in Column B.
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Find the mean of the prices (Column B) by taking the sum and dividing by the number of days, which is 10 in our example. The answer is $9.50.
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Create a third column called Variance. Find the difference between each price and the mean and square it. This is your variance. The variance for Day 1, in this example, is $5.00 - $9.50 or -4.5^2 = 20.25. The variance for Day 2 is $6.00 - $9.50 or -$3.50^2 = 12.25.
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Calculate the Standard Deviation (Volatility). Take the sum of the Variance, Column C. In our example, the sum equals $82.50. Now take the square root of this sum. The answer is 9.08 which is always expressed as a percentage when given as a measure of Volatility.
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