Estimate of the volatility of the returns (i.e. the standard deviation) of an asset from the assets historical returns.
historicalReturns[t]
is the return (in absolute or relative percentage terms) of the asset in the t
th period. Note that if the absolute (resp. percentage) returns are used then the returned volatility will be expressed in (absolute or relative percentage) terms. Moreover, if the daily returns are used then the returned volatility estimate will be an estimate of the daily volatility and so on.The number of historical values which should be used
The number of historical values used here in order to estimate the volatility should reflect the length of the period over which a reliable estimate of the volatility is required. For example, if an estimate of the 1-month volatility is sort then it is reasonable to use at least the last 1-months historical values up to a few years of historical values.
If the market under consideration goes through seasonal or business cycles, or if a given company has transformed itself then the observations used in order to estimate the expected volatility should reflect these issues. For example, if company which was a diversified general industrial company has since refocused on certain key areas, then in terms of estimating its expected volatility from historical values it is reasonable to only consider the period after the company refocused.
AssetParameters Class | Portfolio Namespace