ABSTRACT
In this chapter, I will construct a diagnosis kit to identify flexibility-related problems in companies. A company’s current stock price is a reflection of the market’s expectation of the future prospects of the company. The characteristics of historical stock prices may give us some indication as to what has been happening in the company. What we are interested in is not predictions of stock prices but rather the “shape” of the stock price returns from the past. For example, we can measure the uncertainty seen in the stock prices of the company in the past. We can measure the uncertainty in stock price by its volatility. This indicates how much the stock price moved around in the past (historical volatility). Companies in volatile industries such as high technology, life sciences, and energy are expected to show high volatility in their stock prices. This is because these industries are changing fast and new technologies and innovations appear routinely that have a big impact on the companies that play in these industries. We can calculate volatility by using the daily, weekly, or monthly returns from the company’s stock price and finding a standard deviation of those returns. The higher the standard deviation, the higher the volatility and the overall risk exhibited by the stock price. If the company’s stock has options trading in the market, another measure, called implied volatility, can also be calculated. This is possible because volatility is an important factor that drives the prices of options. The implied volatility shows how much the market expects the stock price to move around in the future. So, this is a forward-looking measure.
