Understanding the Four Measures of Volatility By Scott Rothbort

Updated from 3/8/2007 at 2:15 p.m. EST

“Volatility” is a term that is increasingly interjected into financial market commentary by the press and professionals. In fact, Bloomberg Radio has a daily “Volatility Report.” While the term is being thrown around with a seemingly high degree of expertise, I find that the concept is not well understood by most commentators and the average investor. This module of TheStreet University will cover the four main types of volatility measures:

◾historical volatility;
◾implied volatility;
◾the volatility index; and
◾intraday volatility.

Type 1: Historical Volatility

Volatility in its most basic form represents daily changes in stock prices. We call this historical volatility (or historic volatility) and it is the starting point for understanding volatility in the greater sense. Historic volatility is the standard deviation of the change in price of a stock or other financial instrument relative to its historic price over a period of time. That sounds quite eloquent but for the average investor who does not command an intimate knowledge of statistics, the definition is most overwhelming.

Think of a Pendulum

To help you visualize the concept of volatility, think of a pendulum like in the picture below. The pendulum is constructed from a steel ball, attached to a rope and then suspended from a ceiling.

http://www.thestreet.com/content/image/38564.include

The pendulum starts at the resting state when our ball is at point 2 (the mean). If you raise the ball to point 1 and let it go, the ball would then swing from point 1 to point 3. Over time that ball will swing back and forth always passing though point 2. If this were a stock, the difference in distance from point 1 to point 2 or from point 2 to point 3 represents the volatility in the movement of the stock price.

So as not to get into any trouble with physicists out there, the formulas for standard deviation and movement of a pendulum are different and I am not equating the two from a statistical perspective. Rather, I am only using the pendulum as a visual aide. Stocks with a swing that is greater from point 1 to point 2 vs. that of another stock will have a higher volatility than the other stock.

Now imagine a wind hitting the metal ball. The force of that wind will increase a stock’s volatility. Market corrections, increases in uncertainty or other causal factors of risk will be the wind that shifts volatility higher. Say that there is no wind, but rather calm over the markets. Since there is no outside force to apply motion to the pendulum, the arc of the movement from point 1 to point 3 will decrease. This is when volatility declines. Some call this complacency, but it is generally viewed as a market with low or declining volatility.

Source : http://www.thestreet.com

Have You Ever Taken a Chance in Life? by freefincal

I am a fan of actor Kevin Costner. I think he has taken pretty big career risks,pulled off some and failed in some, but has always stuck to his guns, which is admirable. He has even declared that if his stardom vanishes overnight, he can make a decent living with a blue collar job, because he is skilled.

I saw an YouTube interview yesterday in which he mentioned that, his father regretted never having taken a chance in life and having been in the same job all his life. Costner had to reassure him that he had been a good father who provided all he could for his family.

That set me thinking about my own life. Regular readers would be well aware that as an investor, I am pessimistic, cautious, and always keen to contain downside risk. It might surprise them, (as it did me!), that when it came to my career, I had repeatedly taken chances. Some driven by my heart- a refusal to do something that I don’t like, some was driven by my stupid self-belief.

I once gave up a lucrative contract in Germany because I felt home-sick. One part of me said I was committing career suicide (as did my mentors and many of my friends) and one part of me said, I can work in peace only when I happy.

After coming back home, I worked without pay for 4 months, when my employer took pity and created a makeshift position for me.

For the next 6-8 months, I did not look for any other job but put all my cards on a single job which I was desperate to get as it was the only one that appealed to me.

I got the job and completely changed my area of research. This is again considered professional suicide as it will take at least a couple of years to get published.

Though I was doing quite well, nearly two years later, positions for my dream job -one that involved teaching – was open.

There was fierce pressure from my current employer to prevent me from taking the interview. My father was fighting cancer and I was confined to the hospital taking care of him. I prepared for the interview from there.

Things got to such a point that there was the serious danger of losing both jobs – my current one and my dream job. My father urged me to take the chance. He said he believed in me and asked me to go for it.

The gamble paid off. I got the position but I went ahead and committed career suicide once again(!) by choosing to work in another entirely different research area.

While I did quite well on the teaching front, research was riddled with stumbling blocks. Thanks to some hard-working and spirited students, I was able to set up a decent laboratory.

After nearly a decade of doing this, I think I am all set to commit professional suicide once again! (Sorry can’t say more).

As mentioned above, some of the chances that I took was driven by my heart, and some by ridiculous self-belief that I could pull it off. Sometimes it worked and sometimes it did not. In hindsight, considering my current circumstances, I am glad that I took those chances. Well, at least some of them!

Point of this rant

If you had a chance to take up a job that you truly love, will you take a chance and make an all-out effort to grab it? Even if it meant risking a cushy salary and perhaps your career in a particular area? Will you quit your well-paying job to become an entrepreneur?

I would probably vote, yes, but we will have to accept the consequences without too much regret.

Wealth creation or financial security has two components to it: Income and investing.

Investing is independent of how we earn an income. There are those who have taken some big chances with investing. I dont have the stomach for that. Perhaps because I am always doing stupid things to my “career”.

Income is a different ball game. We could earn from a job we truly love (in which case we wont worry about how much we make) or we could earn from a job we truly hate (in which case, all we care about is how much we make).

Sometimes the time window in which we could shift from a job we hate, to a job we love could be quite tight and narrow

Sometimes we will have to take a chance in life to achieve lasting change and happiness. Sometimes we will have to roll the dice and see how it pans out.

The regret of never having taken a chance could be greater than the consequences of having taken one.