Volatility and the Square Root of Time
It was not obvious (at least to me) that volatility theoretically scales with the square root of time (sqrt[t]). For example, if the market’s daily volatility is 0.5%, then theoretically the correct value of volatility for two days is the square root of 2 times the daily volatility (0.5% * 1.414 = 0.707%), or for a 5 day stretch 0.5% * sqrt(5) = 1.118%. This …
