What is Volatility in Trading? | Introduction, Fundamentals & Calculation of Volatility | Quantra

Part of the course Financial Time Series Analysis for Trading.
***START FOR FREE***

Timestamps
0:00 - Title
0:12 - Meaning & Definition of Volatility
0:55 - Example
1:56 - Measuring Volatility
2:27 - End

Welcome to this video lesson on volatility. After completing this you will be able to explain volatility and how to calculate daily volatility.
What is the first thing which comes to your mind when I say something is highly volatile?
You might answer that it is something which is moving quite a lot or handle it with care. Right. However high volatility also means your gains can be more with added risk.
But what is the textbook definition of volatility? Volatility is the measure of the dispersion of returns for a given asset or index. In simple words, it tells us how much an asset moves up or down with respect to the mean in a given time period.
For example the daily returns of two different stocks are shown. Will you be able to tell which stock is highly volatile and which one is low?
In the left graph the daily returns are hovering between -4 and 6%. Whereas in the second graph the returns are moving from -20 to 15%. This means that while you could gain 15% in a single day, you could also lose 20%!
This makes Coca-Cola less volatile than Tesla. As the daily returns of Coca-Cola are not prone to extreme fluctuations. Investors such as pension funds who prefer low volatility would prefer Coca-Cola over Tesla. In this way volatility plays a role in investing and trading decisions.
How do you measure volatility?
Since volatility is how spread out the returns are the standard deviation of the log returns can be used to measure volatility. The steps are shown on screen. Since you use daily log returns to calculate the volatility it is called daily volatility. The daily volatility of Tesla is 3.46% and Coca-Cola is 0.9%.
In the next video unit you will learn about the importance of volatility.

Quantra is an online education portal that specializes in Algorithmic and Quantitative trading. Quantra offers various bite-sized, self-paced and interactive courses that are perfect for busy professionals, seeking implementable knowledge in this domain.