What Is Historical Volatility?

By Samantha Baltodano

TL;DR:

Historical volatility is a measure of the fluctuation in the price of a security over a given period of time, often used by investors to assess risk. It is calculated using the standard deviation of daily returns for a security and is different from implied volatility, which is a measure of expected future volatility.

What Is Historical Volatility?

Historical volatility is a statistical measure of the fluctuation in the price of a security over a given period of time. It is often used by investors to assess the level of risk associated with a particular investment.

To calculate historical volatility, analysts use the standard deviation of daily returns for a given security over a specific period of time, such as the past year or five years. 

The standard deviation is a measure of how much the return on an investment is expected to deviate from its average. A high standard deviation indicates that the returns on an investment are spread out over a large range, which can be a sign of higher risk.

Historical volatility is different from implied volatility, which is a measure of the expected future volatility of a security. Implied volatility is often used by options traders to gauge the level of risk in the market and to help determine the price of options contracts.

Use Case

There are several ways that investors can use historical volatility to assess risk.

For example, a security with a high historical volatility may be considered riskier than one with a lower volatility, since the price of the security is expected to fluctuate more over time. 

On the other hand, a security with low historical volatility may be considered less risky, but it may also offer lower potential returns.

It's important to note that historical volatility is only one factor to consider when evaluating the risk of an investment. Other factors, such as the financial health of the company, industry conditions, and the overall market environment, can also affect the level of risk associated with a particular investment.

Summary

• Historical volatility is a measure of the fluctuation in the price of a security over a given period of time
• It is calculated using the standard deviation of daily returns for a security
• Historical volatility is often used by investors to assess the level of risk associated with an investment
• It is different from implied volatility, which is a measure of expected future volatility

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