I'm trying to learn the the Black–Scholes option pricing formula and one of the elements of that formula (according to http://bradley.bradley.edu/~arr/bsm/pg04.html) is the "standard deviation of stock returns".
I know if I download a CSV file of historical prices from Yahoo! and open up Excel and execute STDDEV(column with prices), I can get the "standard deviation of stock PRICES". But that is not what I need. I need the "standard deviation of stock RETURNS".
Does anyone know how I can calculate this in Excel? Or even better yet, if someone can provide a implementation in code showing how to do it?
Some of the questions that came up in my head when thinking about how to approach this include "how much historical data to use? (how far back to we go when downloading the CSV file from Yahoo!)" and "what kind of stock returns are we supposed to be calculating? Annual stock returns? Daily returns?"