What is an allocation method in Fincanva?

Allocation methods in Fincanva define how capital is distributed—either between assets within a model or between models within a portfolio. The allocation method you select significantly affects each component’s contribution to your overall investment performance and risk profile. Understanding these methods helps you align your strategy with your financial goals and risk tolerance.

Equal Weights assigns the same percentage of capital to each asset or model. It’s easy to implement and ensures diversification, but it ignores differences in asset characteristics such as volatility or expected return.

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Fixed Weights lets you manually set the percentage of capital for each asset. It offers control and customization but requires periodic rebalancing and doesn't adapt to market changes.

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Floating starts with either Equal or Risk Scaling weights and allows allocations to shift with market movements. It reduces trading costs but may cause portfolio drift.

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Market Cap Weighted allocates based on asset size, favoring larger-cap companies. It reflects the broader market but may over-concentrate on big firms.

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Beta Neutral balances long and short positions to achieve zero correlation with the market. It’s ideal for market-neutral strategies but may require frequent rebalancing.

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Mimicking Portfolio replicates a chosen benchmark’s structure and performance. It’s useful for passive investing but may not capture all nuances of the benchmark.

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Minimum Correlation allocates capital to reduce asset correlations, enhancing diversification and lowering risk.

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Modern Portfolio Theory (MPT) uses historical data to find the optimal balance of risk and return. It constructs Markowitz efficient frontier portfolios and is ideal for optimizing risk-return tradeoffs.

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Ranking-Based allocation distributes more capital to higher-ranked assets based on criteria like past performance or Sharpe ratio.

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Risk Scaling adjusts allocations based on asset volatility. Riskier assets get less capital to stabilize overall risk.

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Risk Parity aims for equal risk contribution across assets, allocating more to lower-risk assets and less to higher-risk ones.

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Choosing the right allocation method is essential for shaping how your model or portfolio behaves under different market conditions. Fincanva allows you to experiment with these methods through simulations to see their potential impact before making real investment decisions.