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Allocation is equivalent of 'weightage' given to each stock.

A 5% allocation implies one can invest 5% of the portfolio in this stock. For instance, if one's portfolio size is Rs 10 lacs, 5% would imply putting Rs 50,000 in the stock.

For this purpose, the base for calculation should not be current cash in hand, but total capital one is planning to invest over next 1-2 years. For instance, an individual currently has Rs 5 lacs to invest but will keep adding funds and overall wants to invest Rs 15 lacs over next 12 months. For calculating allocations, he should use Rs 15 lacs as base.