In the language of finance, volatility refers to the degree of variation in trading prices series over time as measured by standard deviation of returns. This can be measured in various ways by calculating the average mean of prices for the number of observations and then determining each period’s deviation and then finally summing up the deviations on a chart to give a brief analysis. The results are the finally summed up in the form of standard deviation. If you are still confused about the way in which one can measure the volatility of prices, you can consider the following points to make yourself aware about it.
How to Measure Volatility of Prices
1. Series of Past Market Prices:-
Historic Volatility is a series of market prices recorded and taken out from the past of a particular market. Historical method proves to be much easier and more accurate way to measure and examine the risk. You simply need to graph the historical performance of investments on a histogram with this method and you can easily determine the volatility of prices.
2. Determining the Implied Volatility:-
Implied volatility can be derived from market price of a market traded derivative. This is particularly based on a standard deviation. Once you know how to bring this method in use, it will get rather easier for you to determine the implied volatility.
3. Standard Deviation as a Measure of Volatility:-
Most of us take the measure of standard deviation as the measure of volatility. Let me make you understand this with the help of an example. Most of the investors use standard deviation as a statistic or data for measuring the deviation and this when it is easy to calculate as well as easy to execute, one can easily take standard deviation as the measure of volatility as well.
4. Making You Familiar with a Standard Deviation:-
Standard deviation is the square root of average squared deviation of the data from its mean. By calculating the standard deviation, we can easily determine the volatility of prices. Just fix a blank chart over the wall and then draw two axis on it i.e. “X” and “Y” meeting at a particular point “O”. Now use this chart to make comparison between the old market values and the current trend and you will easily be able to consider the volatility of prices by considering the value of standard deviation.
5. Finding the Standard Deviation:-
Begin by calculating the mean or average of price for a recorded number of observations or periods and then determine each of this period’s or observation’s deviation. Now square each of this deviation and then divide this sum by the no. of observations. Standard deviation will be obtained as the square root of that number. I know the approach is a little bit mathematical but still you can bring it in use to find deviation/volatility for any set of recorded market values.