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Definition of Volatility

Volatility Image 1

Volatility

A measure of risk based on the standard deviation of investment fund performance over 3 years.
Scale is 1-9; higher rating indicates higher risk. Also, the standard deviation of changes in the logarithm of an
asset price, expressed as a yearly rate. Also, volatility is a variable that appears in option pricing formulas. In
the option pricing formula, it denotes the volatility of the underlying asset return from now to the expiration
of the option.
Std Deviation = Rating
up to 7.99 = 1
8.00-10.99 = 2
11.00-13.99 = 3
14.00-16.99 = 4
17.00-19.99 = 5
20.00-22.99 = 6
23.00-25.99 = 7
26.00-28.99 = 8
29.00 and up = 9


Volatility

The probability of change


Volatility

a. Another general term for sensitivity. b. The standard deviation
of the annualized continuously compounded rate of return of an asset. c. A
measure of uncertainty or risk.


volatility

A measure of the amount of change in the daily price of a security over a specified period of time. It is Uusually given as the standard deviation of the daily price changes of that security on an annual basis.



Related Terms:

Implied volatility

The expected volatility in a stock's return derived from its option price, maturity date,
exercise price, and riskless rate of return, using an option-pricing model such as Black/Scholes.


Implied volatility

For an option, the variance that makes a call option price
equal to the market price. Given the option price, strike price, and other
factors, the Black-Scholes model computes implied volatility.



Reward-to-volatility ratio

Ratio of excess return to portfolio standard deviation.


Volatility risk

The risk in the value of options portfolios due to the unpredictable changes in the volatility of
the underlying asset.


Volatility Image 2

Beta

The price volatility of a financial instrument relative to the price
volatility of a market or index as a whole. Beta is most commonly used with
respect to equities. A high-beta instrument is riskier than a low-beta
instrument.


Black-Scholes model

The first complete mathematical model for pricing
options, developed by Fischer Black and Myron Scholes. It examines market
price, strike price, volatility, time to expiration, and interest rates. It is limited
to only certain kinds of options.


Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.


Graham-Harvey Measure 1

Performance measure invented by John Graham and Campbell Harvey. The
idea is to lever a fund's portfolio to exactly match the volatility of the S and P 500. The difference between the
fund's levered return and the S&P 500 return is the performance measure.


Graham-Harvey Measure 2

Performance measure invented by John Graham and Campbell Harvey. The
idea is to lever the S&P 500 portfolio to exactly match the volatility of the fund. The difference between the
fund's return and the levered S&P 500 return is the performance measure.


Hedge ratio (delta)

The ratio of volatility of the portfolio to be hedged and the return of the volatility of the
hedging instrument.


Hedging

A strategy designed to reduce investment risk using call options, put options, short selling, or futures
contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by
reducing the risk of loss.


Index Portfolio Rebalancing Service (IPRS)

Index Portfolio Rebalancing Service (IPRS) is a comprehensive investment service that can help increase potential returns while reducing volatility. Several portfolios are available, each with its own strategic balance of Index Funds. IPRS maintains your personal asset allocation by monitoring and rebalancing your portfolio semi-annually.


Kappa

The ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility.


Volatility Image 3

Lambda

The ratio of a change in the option price to a small change in the option volatility. It is the partial
derivative of the option price with respect to the option volatility.


Sensitivity

The "what if" relationship between variables; the degree to which
changes in one variable cause changes in another variable. A specific synonym
is volatility.



standard deviation

Square root of variance. Another measure of volatility.


variance

Average value of squared deviations from mean. A measure of volatility.


Vega

The rate of change in the price of a derivative security relative to the
volatility of the underlying security. When vega is large the security is
sensitive to small changes in volatility.


Yield curve option-pricing models

Models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.



 

 

 

 

 

 

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