If you wish to find a way to gauge the dispersion of your returns for an index statistically, volatility is the answer.
In simpler terms, volatility is measurable as variance, or you can measure it as a standard deviation between the returns of the same item in a different market index.
Now, for instance, the security rises in value and falls within a certain time frame; this is what you call volatility. In simpler terms, it is the percentage of the uncertainty of an asset’s value in the market.
Easy Way to understand it
More volatility means more potential that your assets’ value is going to be in a wide value range. This means the assets’ values can change drastically anytime.
Let’s just say it is a gamble dealing in high volatility items, especially if you do not know what you are doing. Therefore, keep an eye on how the market moves.
Lower volatility is good; it guarantees a steady price with no surprises or extreme fluctuations. You can calculate volatility in percentage value and track it periodically, i.e., daily to weekly and monthly to an annual basis.
The Calculation is the Key
Standard deviation is one way to gauge your assets’ volatility. Let us dive a little deeper while keeping it simple.
For example, you own a monthly stock with a closing price of $2 through $20. Month one is $2, and the value increases by a dollar every month for the next 20 values.
Steps to Calculate Volatility
You must follow the below-mentioned steps to gauge the volatility.
- Let us find the mean value of an asset first, i.e., adding up all the values and using the total number of values to divide them with; therefore, if you add $2, $3, and $4, all the way up to the value of $20. You will get $210. Take this value and divide it by 20, and you will have your average price at $10.50
- Let us now calculate the difference between each average and the actual data value. What we are going to do is subtract $10.50 from 20, then subtract $10.50 from 19 and continue to do so all the way up to the value of zero.
- Square these values from step 3, and it will eliminate any negative numbers.
- Add all the squared from step 3 deviations.
- And finally, divide your total sum from step 4 by total data values.
The value you have is the volatility of your asset.
