Volatility of Project Formula

Volatility of Project Formula

Volatility of project varies with the length of period. It means longer period project has higher volatility and shorter period has small volatility. Relationship between time and volatility has been explained by the following formula

S.D (Longer period) = S.D (short period of time) √T – measure of volatility

Volatility of Project example

Project has cash inflow of 200,000 annual. Life of project is 5 years. Volatility in cash flow is 30,000. Calculate the cash inflow for 5 year and volatility.

Solution

Cash flow 5 years = 200,000 x 5 years = 1,000,000

Volatility for 5 Years = 30,000 x √5

=30,000 x 2.236

= 67080