The economic implications of volatility scaling by the square-root-of-time rule

The objective of research in this chapter is to demonstrate the implications for scaling financial asset risk when long-term returns do not follow a Gaussian random walk. Using a selection of Australian Stock Exchange (ASX) Top 50 equities, volatility at horizons ranging from 1 day to 1 year is measured directly and for longer time horizons, by linearly rescaling short-horizon volatility. The research shows that even small deviations from pure random behavior can lead investors to significantly misestimate their real level of risk.