I am studying the term volatility drag. The common example is that I invest $1000 in a company stock. Say, the stock goes down 50% and than goes up 50%. This would result in $250 loss. I would only have $750 after the swing ($1000 -> $500 -> $750), even though the stock go down 50% and come back up 50%.
My question is that does stock go up and down by percentage or by dollar? The volatility drag would only be a problem when the stock goes up and down by percentage. In my previous example, say this company I invested in, lost Y percent revenue from their original revenue X. Assuming there is no other factors, the stock from $1000 a share went down 50% to $500 a share. In the next season, this company was undergoing changes, that has earned the extra Y percent revenue back into their original revenue X. Does the stock only go up 50%, or does it go up to the original dollar amount $1000 a share? If the stock only go up 50%, than I could see how volatility drag hurts me. But, if the stock goes up to the original dollar amount $1000, than I don't see why volatility drag would be an problem to me. Since a company revenue went down and come back up to its original performance, the stock value would make up the difference of the volatility drag.
