Measuring the Risk - Volatility

 
When it comes to investment, in addition to the return on the investment, the other thing that we are always interested in knowing is that how much risk we are taking to make a specific investment. But exactly what is risk? How can we quantify the risk?

Risk VS. Uncertainty

Although there is no clear distinction between the risk and uncertainty, we can use Frank Knight’s distinction as the starting point: Risk has an unknown outcome, but we know what the underlying outcome distribution looks like. Uncertainty also implies an unknown outcome, but we don’t know what the underlying distribution looks like. For example: Amazon is going to announce its fourth quarter earnings in January 31, 2012. As of writing, we don’t know what the price movement of amazon stock is after the earning is announced, but we do have the past history to measure the likelihood of the price movement after earning is announced. That’s the risk. On the other hand, current European sovereign debt crisis posts an uncertainty for us because the outcome is unknown and there is no past history for us to gauge the likelihood of the outcome

Measuring the Volatility of the Stock as the Risk

Although there is no way to measure the uncertainty of a particular stock, we can measure the volatility of the stock according to the past history of price movement to represent the risk of investing in the stock. The volatility of the stock is simply the standard deviation of the price movement for a certain period of time:

Calculate the Risk of the Market (S&P 500)

You can calculate the risk of the market (S&P 500) or any particular stock/ETF you are interested in by following steps:
1. Get the stock historical price data: Use Stock Historical Data Download to download the past 10 years, monthly price movement for symbol S&P 500 (^GSPC)
2. Calculate the monthly price % change based on the monthly price movement
3. Uses the Excel function (STDEV.S) to calculate the volatility for you. Remember you have to times the number by sqrt(12) to make it annualized volatility
You can download the sample excel here
Following is the S&P 500 volatility distribution based on last 10 years, 5 years, 3 years, and 1 year data

The volatility ranged from 16% to 18.9%.
As we can see, the volatility of the stock changes if we use the different intervals of past history
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New Version of Stock Historical Data Download Available Now

We are pleased to announce that the Stock Historical Data Download version 1.6 is released! If you have purchased this software before, you can upgrade to the latest version simply by login to your account and reinstall the file. New features in the latest version includes the integration of the command mode and the capability to save/load .set file directly from Setting Window

Integration of the Command Mode

Stock Historical Data Download supports command line argument to achieve the fully automation. It is done by reading the symbol list file (.slist), which includes the symbols going to be downloaded, and the setting file (.set), which includes the setting options that are going to be loaded to setting window.

Create/Load Symbol List file

We recommend you to create/load symbol list file (.slist) by following steps:
1. Add the symbols you want to save in the .slist file, then chose File->Save File->Symbol List from main window to save the list into the file
2. To load the saved .slist file, simply choose the file from File->Open->Symbol List from main window

Create/Load Setting File

We recommend you to create/load setting file by following step:
1. In the setting window, choose the setting you would like to save, then click OK
2. In the main window, choose File->Save File-> Setting to save the current setting into .set setting file. Note the data field information will also be saved
3. To load the saved .set file, simply choose the file from File->Open->Setting

Use the Command mode

Stock Historical Data Download supports the command mode by directly activating the exe file “StockDataDownload.exe” from the Windows console. Following is the sample screenshot of the command mode window:



You can find the executable from the installation directory. The command mode has the general format:
StockDataDownload.exe -s “slist file” -o “setting file” [-q]
“slist file” is the target symbol list file.
“setting file” is the predefined setting file
if –q option is specified, the command mode window will be automatically exist when the task is done otherwise you have to hit the Quit button to exist the window
You have to specify both files to make the command mode work

Directly Save/Load .set file from Setting Window

Following is the sample screenshot of the Setting Window for version 1.6



At the Bottom of the window there are Save/Load buttons that allows you to directly save/load .set file from the Setting Window. It is more convenient!



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