Volatility

12 Dec

Volatility is the measurement of how the  returns for a given security or market index are spread out. In other words, it is defined as the amount of uncertainty or risk in relation to the changes in a security´s value. It is usually measured by using the standard deviation or variance. A higher volatility means that a security´s value is spread out over a large range of values, and it means that the investment is riskier. In other words, that the value of the security can change dramatically at any time.

I believe that volatility can´t be infinity given the Central Limit Theorem. For example, the implied volatility of a strike call goes to infinity as maturity goes to zero, and this implies that volatility is always finite prior to the expiration date.

Question of the week: When solving the last webwork, I noticed that Ce(0) = Pe(0). Is is due to the symmetry of the normal distribution?

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