Annualized volatility describes the variation in an asset's value over the course of a year. This measure indicates the level of risk associated with an investment. This includes the distribution of a portfolio that features the asset, and the likelihood of a shortfall when during the asset's eventual sale. A stock's annualized volatility typically refers to the variation in the size of its returns rather than the stock price. Investors who participate in volatility arbitrage trade stocks based solely on their volatility.
1. Calculate the standard deviation of the stock's daily returns for whatever period on which you have data. Standard deviation is the square root of values' variance, which is the average difference between the values and their mean. You can calculate standard deviation manually, but it's easier to use a spreadsheet or online tool. For example, assume that the standard deviation for a stock's returns over an 18-month period equals 0.0075.
2. Find the square root of the number of trading days in a year. Economists base forecasts on 252 trading days in a year, and the square root of 252 is 15.87.
3. Multiply the previous steps' answers together: 0.0075 --- 15.87 = 0.119 percent. This is the stock's historical annualized volatility.
- Although investors sometimes use a stock's actual current volatility to forecast future volatility or future returns, stocks can perform unpredictably.
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