What you will learn
- Return sampling
- Close-to-close estimates
- Range-based estimates
- Annualization assumptions
Return sampling
Realized volatility summarizes observed return variation over a defined interval. Specify return type, sampling frequency and window. Changing any of these changes the measured quantity, so two values called volatility may not be directly comparable.
Close-to-close estimates
Close-to-close estimates use sampled returns and can miss intraperiod paths. A day with a large excursion and little closing change may contribute little to that measure despite substantial intraday risk.
Range-based estimates
Range-based measures use high-low or other bar information under particular assumptions. They can capture information absent from close-only returns, but gaps, market microstructure and incomplete coverage can affect their interpretation.
Annualization assumptions
Annualization converts a sampling-scale estimate under assumptions about time aggregation. Square-root-of-time scaling is not a universal law when returns are dependent or volatility changes. Label both the original frequency and conversion assumptions.
Worked example
Two days each close unchanged. One barely moves; the other rises sharply and reverses. Close-to-close returns are zero for both, but their intraday exposure paths differ substantially.
Try it yourself
Specify two measurements that would distinguish those days and explain why a closing-return measure alone is incomplete for intraday risk.
Show the worked solution
High-low range and intraday sampled variation are possible choices. Record their data coverage and frequency. They describe different aspects of the path and should not be treated as interchangeable forecasts.
Apply this to your course project
Compare several volatility estimates and document where their forecasts fail.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.