I am conducting PCA on several return series of funds and am finding that when I look at the first principal component the values are huge and this the volatility is also enormous relative to the funds I have used to construct the PCA.
The average return vol for the funds is 3.38% with the largest being roughly 5%. The volatility however for the first PC is 17%, I thought the first PC was most likely a market factor (although with funds instead of stocks I’m not sure). I think the first PC in this instance is most likely a healthcare factor as funds with large loadings in the first PC are heavy on healthcare stocks.
My question therefore is how can the first PC have such a large volatility and what might the first PC represent (not specifically)?