It’s hard to overestimate the power of volatility for monitoring, modeling and forecasting risk in the art/science of portfolio management. The challenge is deciding what to focus on. Even the seemingly simple task of defining volatility is complicated since the signals can vary rather substantially at times when analyzing markets through, say, a prism of standard deviation of return vs. a trading range of an asset’s price. As a general description, I’m fond of Professor Ser-Huang Poon’s reference in his book A Practical Guide to Forecasting Financial Market Volatility: “the spread of all likely outcomes of an uncertain variable.” In any case, bringing order to what can be a black hole of possibilities is essential in this corner of risk management. The potential for genuine insight is considerable, but we almost never reach the promised land without a fair amount of analysis. Perhaps the first rule of extracting the maximum amount of information from the ebb and flow of market volatility is choosing objectives and then figuring out the best path for success.
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