To be repetitive, take note of the two time periods involved:

1. The sampling window

This can be daily, weekly, monthly, annual returns. It can even be a return based on tick vols (hourly, minutely…)

2. The lookback period

This is how far back in time we are sampling returns

For example, we can sample:

• daily returns for the past month or year
• hourly returns for the past day or week

The lookback determined the sample size.

The sampling window determines our annualization factor.

<aside> 💡 Annualization factor examples

• daily = √251
• weekly = √52
• monthly = √12
• hourly = √(251 x 6.5) = √1631.5

*You can go crazy with this if you want. There are days when the markets close early, the number of periods varies with leap years or what day of the week January 1 falls on.

But maintain a sense of proportion. Any error do to these differences will be swamped by the fact that all implied vols and realized vols are imperfect measures because time itself is linear while event or voltime is not. See ⏳Understanding Variance Time

You simply cannot exhaust how deep you can get into this. Where you draw the line depends on your strategy. 99.5% of strategies are robust to the approximations above.

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The key takeaway to remember

The annualization factor has nothing to do with the lookback. It is purely a function of the sampling period. The lookback determines the sample size.