ACCA Strategic Professional · Advanced Financial Management · Application of option pricing theory in investment decisions
Daily share price returns of a proxy company have a standard deviation of 1.5%. Assuming 250 trading days in a year and independent returns, what is the approximate annualised volatility?
Annualised volatility is about 23.7%. Variance grows proportionally with time, so standard deviation scales with the square root of time: 1.5% multiplied by the square root of 250 (15.81) gives 23.7%. Multiplying by 250 would wrongly give 375%.
- A23.7%Correct
- B375.0%
- C1.5%
- D18.8%
Explanation
Annual volatility = daily standard deviation x square root of number of days = 1.5% x √250 = 1.5% x 15.81 = 23.7%. Multiplying by 250 (375%) wrongly scales standard deviation linearly rather than variance.
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