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Explanation:
The relationship to convert a periodic historical volatility into an annualized volatility scales by the square root of time (number of periods in a year): Since the measurement is based on historical return data, it represents historical volatility, not implied volatility (which would be derived from the market prices of options).
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Q.79 A newly employed risk analyst has embarked on analyzing the market risk of a stock in the automobile industry. After scouring the stock's return data gathered over the past 24 months, the analyst estimates the historical volatility of the monthly returns at 5%. Which of the following is most likely correct?
A
The volatility of the annual returns is 60%.
B
The volatility of the annual returns is 17.3%.
C
The implied volatility of the annual returns is 17.3%.
D
The implied volatility of the annual returns is 60%.