Correlation Between Caterpillar and Black Knight

Can any of the company-specific risk be diversified away by investing in both Caterpillar 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 Caterpillar and Black Knight into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Caterpillar and Black Knight, you can compare the effects of market volatilities on Caterpillar 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 Caterpillar with a short position of Black Knight. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Black Knight.

Diversification Opportunities for Caterpillar and Black Knight

0.92

Correlation Coefficient

Caterpillar  Black Knight

Almost no diversification

The 3 months correlation between Caterpillar and Black is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Black Knight in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Black Knight and Caterpillar 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 Caterpillar 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 Caterpillar i.e., Caterpillar and Black Knight go up and down completely randomly.

Pair Corralation between Caterpillar and Black Knight

Considering the 90-day investment horizon Caterpillar is expected to generate 1.84 times less return on investment than Black Knight. But when comparing it to its historical volatility, Caterpillar is 1.26 times less risky than Black Knight. It trades about 0.15 of its potential returns per unit of risk. Black Knight is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  5,507  in Black Knight on January 19, 2024 and sell it today you would earn a total of  2,069  from holding Black Knight or generate 37.57% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	31.28%
Values	Daily Returns

Caterpillar  vs.  Black Knight

Caterpillar

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Black Knight

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Black Knight has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong forward-looking signals, Black Knight is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Caterpillar and Black Knight

The main advantage of trading using opposite Caterpillar and Black Knight positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar 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 Caterpillar 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.

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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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.