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DJIA cross-sectional volatility rises in Q4 as returns fan out

The 10-day cross-sectional volatility of the Dow Jones industrial average remains high after spiking to 7% in late October. During the month, the average 10-day return of the 30 index components was down about 2%. Compared to the markets decline in the first quarter, where the average 10-day return of the index components was slightly lower during the month at -2.4%, there was two-week stretch where the average equity return was down over 6%. What made October different, was the dispersion of those returns. The cohort fell more in unison during February and into March, whereas the relative over/under performance across the index was more spread out in October.

The year has seen rougher waters than 2017, with the index up at a peak of 8.5% in early October, it had also been down as much as 4.8% during a volatile March. While the DJIA did see steeper drops in February and March than October, those drops appeared to sink all ships, rather than leave some above water.

Cross-sectional volatility measures the standard deviation of returns of a set of securities across a given period. High cross-sectional volatility often creates an opportunity for active managers because it puts stock selection at a premium, particularly when markets are down.