Question

i.    Describe how you would test if a market is “excessively volatile”.                     [7 Marks]

ii.   Explain the practical and conceptual difficulties in using a test of an excessively volatile market to establish whether or not a market is efficient. [4 marks]                                                  

Answer 1

'volatility represents how large an assets prices swing around the mean price-its statistical measure of its dispersion of returns'.

There are several ways to measure such as beta coefficients ,option pricing models,and standard deviation of returns.

One way to measure an assets variation is to quantify the daily returns of the assets.this umber is without a unit and is expressed as a percentage.thus,we can report daily volatility,weekly,monthly,or annualized volatility.

TYPES OF VOLATILITY:

a) price volatility

b) volatility in stocks

c) historic stock volatility

d) implied volatility

e) market volatility

HOW TO CALCULATE VOLATILITY

1. Find the mean of the data set.

This means adding each value,and dividing it by numbers of vales.

2. Calculate the difference between each data value and mean.

3.Square the deviations.

4. Add the squared deviations together.

5. Divide the sum of squared deviations by the data values.

HOW O MEASURE:

1. Knowing what volatility is and identifying it:

when investors pick a security,they look at the historic volatility to understand risk of potential investment.A certain stock with drastic price changes and acquiring new highs and lows every now and then is highly volatile

2. primary market volatility measure:

standard deviation s method to measure market volatililty by traders,standard deviation is evaluated from variance's square root.