Volatility aka Standard Deviation

 

Normally we will consider 2 important areas when investing in a particular asset :The Risk & Returns of the asset.

When caculating returns,it will be much more straight forward.However when come to risk assumption between 2 different asset ,we have a method which require more work is by caculating the Standard Deviation of a particular asset
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The Standard deviation of a asset shows how risky the asset is in terms of price variations and by comparing the standard deviation of 2 different asset ,it will enable us as an investors to make informed decisions.

Here, i will compare 2 stocks;SPH & M1.

Using current price of SPH at $4.01 & M1 at $2.75 ,we will caculate the returns of these stocks in terms of dividend yield.

SPH :$0.24/$4.01 = 5.99%  (SPH declared $0.24 dividend)
M1:$0.145/$2.75  = 5.27%  (M1 declared $0.145 dividend)

Now,to caculate the Standard deviation of SPH, we can use excel to do the job for us .

I pluck out SPH & M1 closing price for the whole year of 2011from Yahoo finance (Historical Price) and paste it to the excel sheet

First,we find the price gain in percentage of each day by using the done price on 4 Jan minus the price on 3rd Jan and divided by the price on 3rd Jan.

From there we obtained the Daily Standard deviation by applying STDEV formula for all percentage gain from Jan to Dec.

Then caculate the Daily Variance by squaring the result from Daily Standard Deviation. And mutiply Daily Variance by the number of trading days which will get the Annualized Variance.

Square root the result of Annualized Variance and we will get the Standard Deviation of SPH at  13.07% & M1 at 16.50%.

The above result show M1 is more voalite than SPH in terms of price fluctuation and if we compare the returns of these 2 stocks ,i will chose to invest SPH over M1 because not only the returns of SPH is higher than M1,it is less voalite than M1 in terms of price variance. But this does not means we have to chose SPH over M1, if you have the capital it will be wise to split your investment between these 2 stocks.

We can also compare Standard Deviation between any 2 asset class( Gold or bond or a portfoilo of an asset).And by including Gold /Bonds into our investment portfolio ,it will significantly lower the overall risks of our investments as each asset class have different correlation between each other in different economic cycles.

*Vested in SPH*