Risk - a stock is considered risky if the price is unpredictable. The degree in which the stock price is unpredictable is measured as a percentage of the mean (average) price and known as the volatility of the stock. Another way to think of it is that the volatility is the size of the price swing around the mean (average) price of the stock. So if the mean is $100 and the prices deviate $10 from it, that is, it fluctuates between $90 and 110, then the stock could be described as having a 10% volatility. Volatile stocks are often considered riskier than less volatile stocks because the price is expected to be less predictable. Volatility diminishes the rate at which an investment grows over the long term, a phenomenon known as volatility drag.

The example to the right shows you the math behind calculating volatility, which includes basic arithmetic with a bit of statistics (i.e., standard deviation).

Here is the formula for standard deviation: SD = √(("∑" ("Rn" -"Ravg)2" )/n)

The math is pretty straightforward but imagine doing this for all the weekly closing prices for the last 10 or 20 years, across all the stocks in your portfolio. RichKat will automate the entire process, from the pulling in the historical closing prices to doing all the math that is required. Once you have built your portfolio, you’ll instantly see the volatility of each stock as well as the overall volatility of your portfolio.

Similar to expected returns, our projected future volatility is based on historical data and as you know, history may not repeat itself. It often does but not always. So if you believe the company is experiencing a business model transformation that could change its volatility, you can enter a different value and see how it changes the portfolio performance.

Ready to try see how volatile your stocks are or more importantly, understand your portfolio risk?