Volatility refers to the rise and fall in the prices of stocks. Higher volatility means higher risk or uncertainty while lower volatility means lower risk or uncertainty.
Volatility is measured through various statistical tools such as variance and standard deviation. Standard division is the square root of variance. This gives us the idea of how far stock prices may deviate from standard (mean).
Then there is Coefficient of Variation (CV) or Relative Standard Deviation (RSD) which is Standard Deviation divided by the value of mean. It represents the ratio of risk to return. It shows the extent of variability in relation to the mean of the population.
Below is the comparison of all three variables of stocks traded at Pakistan Stock Exchange. KES-ALL, KSE-100 and other international stock exchanges are also included. A lower value of CV is better as it suggests that there is lower risk associated with a stock as compared to its return or average closing price.
In addition, volatility may also be computed on the basis of changes in closing prices i.e. [Today Closing / Last Day Closing - 1]. These represent fluctuation in actual daily return. Below chart calculates "Variance" on "Change" in stock traded at PSX for over last three months.