Reg,
You comment, Again I posit that risk, from an investor's perspective cannot be truly measured by volatility
The risks an investor takes on are specific--a company's credit risk, for example, or the competative risks to the company, or the risk of government action that could influence the company's success or failure, etc., etc., etc.
One of those specific risks is market risk, the risk that the security may flucturate in price due to the market for those securites. There is no better measure of market risk than volatility. Stocks tend to move up relatively slowly but pull back quickly, the reason stocks that abruptly fall on bad news show higher volatility than before the news. The theory behind this, which I'm sure you know, is econonmic. More volatile stocks are considered more risky and investors demand a higher return for accepting higher risk. The way to give them a higher return is to lower the price. Though it happens occasionally, usually on unexpected good news, you seldom see high volatility in the stocks of mature and successful companies.
For example, you mentioned MSFT. With a 26.95% volatility, MSFT presents a market risk slightly higher than the general market (17.34% for the S&P 500 currently) but dramatically lower than the volatility of AOL (77.56%). This fits perfectly with our general sense that AOL is more speculative than MSFT, which has a solid and long-term growth records but is itself not as stolid as the market in general. In other words, volatility helps quantify something we know intuitively, indeed, quantifies market risk so well it is used in the real world to price options, which are used to hedge against market risk.
Best,
--Steve |
