Can any of the company-specific risk be diversified away by investing in both Blackline and Black Knight at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Blackline and Black Knight into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Blackline and Black Knight, you can compare the effects of market volatilities on Blackline and Black Knight and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Blackline with a short position of Black Knight. Check out your portfolio center. Please also check ongoing floating volatility patterns of Blackline and Black Knight.
Diversification Opportunities for Blackline and Black Knight
The 3 months correlation between Blackline and Black is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding Blackline and Black Knight in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Black Knight and Blackline is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Blackline are associated (or correlated) with Black Knight. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Black Knight has no effect on the direction of Blackline i.e., Blackline and Black Knight go up and down completely randomly.
Pair Corralation between Blackline and Black Knight
Allowing for the 90-day total investment horizon Blackline is expected to under-perform the Black Knight. In addition to that, Blackline is 1.3 times more volatile than Black Knight. It trades about -0.04 of its total potential returns per unit of risk. Black Knight is currently generating about 0.15 per unit of volatility. If you would invest 5,760 in Black Knight on July 2, 2023 and sell it today you would earn a total of 1,816 from holding Black Knight or generate 31.53% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Blackline are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent essential indicators, Blackline is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.
Over the last 90 days Black Knight has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly weak forward-looking signals, Black Knight demonstrated solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Blackline and Black Knight positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Blackline position performs unexpectedly, Black Knight can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Black Knight will offset losses from the drop in Black Knight's long position.
The idea behind Blackline and Black Knight pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.
Check out your portfolio center. Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .
Compute new portfolio that will generate highest expected return given your specified tolerance for risk
Macroaxis helps investors of all levels and skills to maximize the upside of all their holdings and minimize the risk
associated with market volatility, economic swings, and company-specific events. View terms and conditions