CFA CFA Level 1 Level 1 Question on Volatility and Annualized STD

# Level 1 Question on Volatility and Annualized STD

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• CFAismy1Goal
Participant
• CFA Level 1
0

Hey Guys – I’m working on a Level 1 question regarding volatility. Given is the 3-month annual spot rate for periods Jan-08 through Jan-10. The third column below is the percentage change from one period to the next that I’ve calculated. From this third column, I’ve calculated the standard deviation to be 30.38%. However, I need to annualize this value. I’ve done so by multiplying 30.38% by the square root of 4 since the spot rates are on a 3-month basis arriving at an annualized STD of 2.53%?

Is my methodology correct on this?

3-month annual spot rate (%)
Jan-08Â  Â  3%
Apr-08Â  Â  2.5%Â  Â  Â  Â  Â  -16.67%
Jul-08Â  Â  2%Â  Â  Â  Â  Â  Â  Â  Â -20.00%
Oct-08Â  Â  3%Â  Â  Â  Â  Â  Â  Â  Â 50.00%
Jan-09Â  Â 4%Â  Â  Â  Â  Â  Â  Â  Â 33.33%
Apr-09Â  Â 5%Â  Â  Â  Â  Â  Â  Â  Â 25.00%
Jul-09Â  Â 4%Â  Â  Â  Â  Â  Â  Â  Â  -20.00%
Oct-09Â  Â 4.5%Â  Â  Â  Â  Â  Â  12.50%
Jan-10Â  Â 3%Â  Â  Â  Â  Â  Â  Â  Â  -33.33%

STD =Â  Â  Â  Â 30.38%
Annualized STD =Â  Â  Â  Â  2.53%

• Zee Tan
Keymaster
• CFA Charterholder
0

I’m not sure if I follow how you get 2.53% by multiplying 30.38% by âˆš4.

30.38% Ã— âˆš4 = 30.38% Ã— 2 = 60.76%