Question

The volatility of a stock is 12% per year. Which is closest to the volatility per month?

A. 2.4%
B. 3.0%
C. 3.5%
D. 3.8%

Answer 1

To find the monthly volatility from an annual volatility of 12%, divide the annual volatility by the square root of 12. The calculation yields approximately 3.4641%, thus the closest answer provided is B. 3.5%.

Step-by-step explanation:

The volatility of a stock on a yearly basis does not directly convert to the same percentage on a monthly basis due to the effects of compounding. To find the monthly volatility from an annual volatility of 12%, we use the formula for converting annual volatility to monthly volatility, which is the annual volatility divided by the square root of 12, because there are 12 months in a year.

Monthly Volatility = Annual Volatility / sqrt(12)
= 12% / sqrt(12)
= 12% / 3.4641
= 3.4641%

Therefore, the closest answer is B. 3.5%.