Aug 26, 2010

Simple Trick to Convert Volatility

My boss came to me today with "how do I convert this monthly vol to annual?". This is by far not the first time someone asked me to convert x-period volatility to y-period volatility. If you're having troubles doing this, here is a simple trick to remember: figure out the multiplier as if scaling were linear, and take the square root of that multiplier. For example, returns scale linearly with time. If someone gives you a monthly returns to convert to annual, you would simply multiply it by 12. So, in the case of converting monthly to annual volatility multiply it by √12. If someone gives you annual returns and asks you to calculate daily returns you would divide it by 252. To convert annual volatility to daily volatility divide it by √252.

P.S. √252≈16, which is the reason for "rule of 16" for converting daily to annual volatility

2 comments:

  1. Anonymous6/10/2015

    I have weekly volatilities over 370 weeks, I like to convert this into an annulized volatility..How does this work?

    ReplyDelete
  2. Anonymous6/23/2015

    There are 52 weeks in a year, so divide the weekly volatility by √52.

    ReplyDelete