Help Please!!

[sweaty]

HI there,

I'm relatively new to this board, but have enjoyed reading your views on trading. If anyone could help me with my essay question it would be great.

It is, "drawing on the CAPM and the option pricing literature, would you expect the volatility of a stock index to be higher or lower than the volatility of a typical stock?"

My first thought was that a fully diversified portfolio such as an index would theoretically have a lower volatility than a single stock. However, i understand that a single stock may have less volatility than a stock index if it's Beta value is closer to zero than the index's Beta value. If the stock's Beta value was greater than the market/index, then it would have more volatility, am i correct in thinking this? Now, this is drawing on the CAPM theory but what can i take from option pricing lit. that would help me answer this? Yes, as volatility increases so does the price of an option for a single stock or a stock index but should i expect to find that option pricing lit. tells me that one's volatility is greater than the other??!! Apologies if i've made this sound a mess but i'd be interested to hear your thoughts.

Regards

Sweaty

 

[User]

sweaty have a look at the ATR's of the FTSE100 stocks and then look at the ATR of FTSE100. I think you'll find that on avearge the FTSE100 moves more than the avearge stock in the FTSE100. I'm not 100% sure nor have I looked into it. If you take Vodafone then 100% the FTSE moves more than VOD. Have a look at ATR's though. This link has some VIX information, have a glance...

 

[RUDEBOY]

Sweaty, i don't know much about options, but in terms of market ratios, what can they offer that futures and stocks can not? Besides implementation.

 

[RUDEBOY]

Cause' i get this impression that all this high fallutin' talk about options is a crock? Options only bear the same resembalance to the market as futures and stock, implementation is the difference. Beta, Delta, work it out for yourself, it's an equation, it all equates. I don't mean to be nonunderstanding here, just interested.