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QuantSchool: Fund allocation and diversification

The Foundation of Portfolio Construction

Proper fund allocation balances growth potential with risk management through strategic diversification across assets and strategies.

Core Allocation Principles

1. Capital Segmentation

• Core Holdings (60-70%): Long-term investments
• Trading Capital (20-30%): Active positions
• Cash Reserve (10-20%): Dry powder for opportunities

2. Asset Class Diversification

Asset Class	Suggested Allocation	Purpose
Equities	40-60%	Growth
Fixed Income	20-40%	Stability
Alternatives	10-20%	Diversification
Cash	5-10%	Liquidity

Strategic Diversification Methods

1. Geographic Diversification

• Domestic markets (50-70%)
• Developed international (20-30%)
• Emerging markets (10-20%)

2. Sector Rotation

• Limit single sector exposure to 15-20%
• Balance cyclical and defensive sectors
• Adjust weights based on economic cycles

3. Timeframe Diversification

• Short-term trades (10-20%)
• Medium-term positions (30-40%)
• Long-term holdings (40-60%)

QuantWave Implementation Framework

Portfolio Construction Rules

• Maximum 5% in single position
• Maximum 20% in single sector
• Correlation threshold of 0.7 between positions
• Volatility-adjusted position sizing

Diversification Metrics

• Portfolio beta calculation
• Correlation matrix analysis
• Drawdown simulation
• Stress testing across scenarios

Common Mistakes

• Over-diversification (diworsification)
• Underestimating correlation in crises
• Chasing past performance
• Ignoring liquidity constraints

Rebalancing Protocol

1. Quarterly portfolio review
2. 5% threshold for rebalancing triggers
3. Tax-efficient reallocation
4. Volatility-adjusted bands

Effective fund allocation and diversification create resilient portfolios that can weather market cycles. By combining strategic asset allocation with QuantWave's correlation analytics, investors achieve optimal balance between risk and return.