How to Calculate Volatilities

Volatility is the variation from the average value of a product or service over a measured period of time. A high variation of price means a high volatility, and, likewise, a low variation of price results in low volatility. Understanding volatilities is important when you are investing in a company so that you can determine whether that company shows volatility drag, which results in a fluctuation of year-to-year returns on an investment. Calculate volatilities by following a few relatively challenging steps.

Instructions

1. List the daily closing price for a stock over 20 periods, which is usually a time frame of a month. Add these closing prices together and divide by the number of periods listed (in this case, 20) to determine the average closing price.

2. Determine the difference between the closing price average and the actual closing price for each of the 20 days. Square the resulting number. In other words, multiply the number by itself. If the resulting number is 15, then to square it, you would multiply 15 by 15, which is 225.

3. Add together the results of Step 2 for the entire period collected, which is 20 days in this case.

4. Divide the total of Step 3 by 20, the number of periods within the collection.

5. Take the square root of Step 4's resulting number. The square root of a number is the number that, when squared, equals the number you started with. For example, the square root of 225 is 15, because 15 times 15 equals 225 (see Step 2). The result is the standard deviation of the stock, which is the number used to represent the stock's volatility for the period in question (20 days in this case).

References

• HubPages: Volatility Definition -- How to Calculate Volatility
• Option Trading Tips: Calculating Historical Volatility

Resources

• Find the square root of a number with Math.com's online calculator