Annualised volatility
Annualised volatility expresses, as an annual percentage, how much a stock's returns fluctuate: it's the most widely used measure of risk.
It's calculated from the changes from one period to the next and converted to an annual basis, so that different stocks and periods can be compared. A government bond may have a volatility of 5%, a large company 20-30%, a cryptocurrency even over 60%.
How it's calculated
You calculate the percentage changes from one period to the next, then their standard deviation, and multiply it by the square root of the number of periods in a year: √252 for daily data (the trading days in a year), √52 for weekly data.
Worked example
If the standard deviation of a stock's daily changes is 1.2%, the annualised volatility is 1.2% × √252 = 1.2% × 15.87 ≈ 19%. Roughly speaking, this means that in a normal year the return swings about 19 points above or below the average.
How to read it
The higher the volatility, the wider the swings to expect, both up and down. Compare it with that of other stocks to understand how much risk you're taking.
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