James Madison
New member
- Joined
- May 15, 2014
- Messages
- 2
Hi,
I'm a stock trader and I often encounter a calculation that makes no sense to me. It's purpose is to represent the amount of change in the price of a stock.
The calculation goes like this: first, calculate the ratio of today's price to yesterday's price. Next, calculate the standard deviation of this over 100 days. This is called historical volatility.
So far, so good. The next step is to "annualize" it. To do this, assume that there are 252 trading days in a year. Take the previous result and multiply by it by the square root of 252, or approximately 15.9.
This makes no sense to me at all, but it is commonly used. I can't see why multiplying daily variance by a constant could possibly mean anything like "annualized'." Does it make any sense to you? Thanks.
I'm a stock trader and I often encounter a calculation that makes no sense to me. It's purpose is to represent the amount of change in the price of a stock.
The calculation goes like this: first, calculate the ratio of today's price to yesterday's price. Next, calculate the standard deviation of this over 100 days. This is called historical volatility.
So far, so good. The next step is to "annualize" it. To do this, assume that there are 252 trading days in a year. Take the previous result and multiply by it by the square root of 252, or approximately 15.9.
This makes no sense to me at all, but it is commonly used. I can't see why multiplying daily variance by a constant could possibly mean anything like "annualized'." Does it make any sense to you? Thanks.