The index measures the market’s expectation of future volatility. Based on options of the S&P 500® Index, the CBOE VIX index is widely used in the U.S to gauge the market volatility.
So why do you need this in your portfolio, and why is it different from volatility?
As discussed in my previous post, volatility is ex-ante. On the other hand, the Vix index uses options of the S&P 500® Index to calculate the market’s expectation of future volatility. The Vix index is a leading indicator.
Click on the image below to view the interactive dashboard.
The price of a security does not go up in a straight light. You may feel like you are on a rollercoaster. All your emotions are running wild the stock you bought is heading a different path to your expected path. Ah! this is the volatility I write about.
The prices swing up one day then down two days. Then you all reasoning is thrown out the window and you decide to close the positions that are causing you stress.
What is the measure volatility?
It is the standard deviation of the log returns on your portfolio, a stock price, an index or any financial instrument.
This is quite useful to understand the behavior and risk of an instrument. With this, you can calculate the expected return of a stock or portfolio.
View the code below to see sample calculations of a portfolio calculation in python. I have used data from yahoo finance. Please download the data if you wish to follow.
You have some spare money and are excited! You want to make this money work for you but you hear all the talk of a bubble coming soon you are worried. What will happen if you invest the spare cash? Will you make some money or will you lose it! This is uncertainty, this is a risk.
Risk is uncertainty. Uncertain your portfolio will return a profit. Risk is a very important topic in the financial markets and in the business world at large. Some risks are listed here.
Foreign exchange risk
and many more…
When building your portfolio you need to be aware of the risks that affect the assets in your portfolio.
When managing a portfolio the quantifiable risk, volatility is the standard deviation of the portfolio return.
When analysing stock you have to remember that this is a time series. What this means is that you can carry out analysis on different time windows.
For example, Analysis of the daily return for one year, analysis of monthly return of one year or yearly return over 5 years.
How do we measure risk one way to measure risk is by using volatility.
In the financial sector an investment portfolio is a collection or basket of weighted set of assets. The holder has a finite amount of cash and wishes to optimise the profit of this portfolio.
How do you create a portfolio?
Have money to invest in something
A broker that can execute on your behalf this can be an online broker or one where you need to call to place orders
Open an account
Analyse and allocate percentage of your money to the shares you want to buy
Yahoo is a very good tool for building dummy portfolios. This does not send your trades to the broker. Below is a dummy portfolio to illustrate a portfolio construction.
How you select the stocks to put into your portfolio is a whole new discussion.
Suppose I had $14,000 in 2019, I decided to buy some stock. Having done some analysis I allocate a proportion of my capital to purchasing the stocks. Below is my percentage allocation and the date of purchase.
As of today this dummy portfolio will be worth just over $22,000 a rise year on year of 65%.
Note: For the purpose of this exercise all the stocks are in the US stock market and are denominated in dollars. There are no other asset type.
THE ARTICLES WRITTEN ON THIS SITE DOES NOT GIVE INVESTMENT ADVICE AND ANY OPINIONS EXPRESSED OR DISCUSSIONS THAT TAKE PLACE HERE CANNOT BE DEEMED TO BE INVESTMENT ADVICE.