Cluster analysis is an easy way to uncover the best allocation method, and correct segmentation

Every investor is faced with the same questions about the ideal allocation strategy. Should you allocate to sectors or regions first? Or is it more important to look at styles first? This dilemma is well known, and there is not one answer, as it depends on the scope of the portfolio and strategy. Furthermore, it is important to have the required data and know how to use it.

The answer depends on the scope of your portfolio. Are you only investing in your region? Or do you plan to create a global portfolio? Once you have established the scope, it is important to make the appropriate segmentation. Markets within each segment should be strongly correlated, while the correlation between segments should be as low as possible. Once you established the appropriate segmentation, the central question can be analysed by applying cluster analysis.

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