Capital allocation methods

Strategic Distribution of Investment Resources

Effective capital allocation maximizes returns while maintaining prudent risk exposure across opportunities.

Core Allocation Methodologies

1. Risk-Parity Approach

Asset Class	Volatility Target	Typical Allocation
Equities	15-20%	30-40%
Bonds	5-8%	40-50%
Alternatives	10-15%	15-25%

2. Kelly Criterion Method

• Formula: f = (bp - q)/b
• Where:
  • f = fraction of capital
  • b = net odds
  • p = win probability
  • q = loss probability
• QuantWave Adaptation: Uses forecast confidence as probability input

QuantWave Allocation Tools

1. Smart Allocator

• Dynamic position sizing based on volatility
• Correlation-adjusted capital distribution
• Scenario-based optimization

2. Capital Efficiency Analyzer

• Measures marginal return per risk unit
• Identifies overallocation pockets
• Suggests rebalancing opportunities

Implementation Framework

The 5-Step Allocation Process

1. Determine total risk budget (1-5% of capital)
2. Calculate position sizes using chosen methodology
3. Adjust for portfolio correlations
4. Implement with discipline
5. Review and rebalance monthly

Advanced Techniques

1. Adaptive Allocation

• Increases allocation during high-confidence signals
• Reduces exposure during market stress
• Uses volatility-regime adjustments

2. Tiered Capital Deployment

• Core positions: 60-70% (stable allocations)
• Tactical positions: 20-30% (active adjustments)
• Opportunistic: 5-10% (high-conviction bets)

Common Allocation Mistakes

• Overconcentration in "sure things"
• Ignoring correlation effects
• Failing to adjust for changing volatility
• Underestimating position liquidity needs

Performance Metrics

• Risk-adjusted return by allocation unit
• Capital efficiency ratio
• Drawdown contribution analysis
• Allocation compliance score

QuantWave's capital allocation systems transform raw forecasts into optimally sized positions. By applying disciplined methodologies and continuous monitoring, investors can maximize their risk/reward efficiency while avoiding concentration pitfalls.