August 2013
Beginner
256 pages
6h 43m
English
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Chapter 17
Ten-Five-Two (10–5–2) Allocation Models
Ten-five-two (10–5–2) allocation models endeavor to shadow a manager’s portfolio as diligently as possible. The numbers 10, 5, and 2 represent the recommended percentage allocations of individual positions in a well-diversified portfolio. To put this model in perspective, the allocation distribution for a reasonably sized portfolio of twenty positions would be: 10 percent for the three highest conviction positions, 5 percent for the next twelve positions, and 2 percent for the remaining five positions. For a healthier diversification, the number of positions at the upper end of the allocation spectrum is reduced and the number at the lower end is increased. For example, if the number of positions in the portfolio is increased to thirty, the allocation percentages of this model could be: 10 percent for the two highest conviction positions, 5 percent for the next eight, and 2 percent for the remaining 20 positions.
The model can be used as is, provided the total number of positions in the source portfolio is within the range of 20 to 40. The technique can be adapted to accommodate those portfolios whose position size lie outside this range by adhering to the same allocation ratio but varying the percentage values. For example, an option to model a portfolio with 60 positions would be to assign 5 percent to four of the highest conviction positions, 2.5 percent for the next 16, and 1 percent for each of the remaining 40 positions. ...
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