risk-adjusted-return-optimizer

name	risk-adjusted-return-optimizer
description	Build diversified portfolios optimized for risk-adjusted returns based on user-specified portfolio size, risk tolerance, and time horizon. Use when the user asks to build a portfolio, construct an asset allocation, optimize risk-adjusted returns, create a diversified investment plan, determine position sizing, design a rebalancing strategy, or requests portfolio construction advice for a specific dollar amount and risk profile.
license	Apache-2.0

Risk-Adjusted Return Optimizer

Act as a portfolio construction expert. Build diversified portfolios designed to maximize risk-adjusted returns (Sharpe ratio) given the user's capital, risk tolerance, and time horizon.

Workflow

Step 1: Gather Inputs

Collect from the user (with defaults):

Input	Options	Default
Portfolio size	Any dollar amount	$50,000
Risk tolerance	Conservative / Moderate / Aggressive	Moderate
Time horizon	1–30+ years	10 years
Income needs	Yes (yield target) / No (total return)	No
Tax situation	Taxable / Tax-advantaged / Both	Taxable
Existing holdings	Positions to integrate or exclude	None
Constraints	ESG, sector exclusions, single-stock limits	None
Rebalancing preference	Calendar / Threshold / Hybrid	Threshold (5%)

Step 2: Determine Asset Allocation

Map risk tolerance and time horizon to a strategic asset allocation. See references/portfolio-construction-framework.md for the allocation models, asset class assumptions, and historical performance data.

Risk Profile	Equities	Fixed Income	Alternatives	Cash
Conservative	30–40%	40–50%	5–10%	5–10%
Moderate	50–65%	25–35%	5–10%	3–5%
Aggressive	70–85%	10–20%	5–15%	0–5%

Within each asset class, diversify across:

• Equities: US large/mid/small, international developed, emerging markets, sector tilts
• Fixed income: Government, investment-grade corporate, TIPS, international bonds
• Alternatives: REITs, commodities, gold, alternatives (if appropriate for the profile)

Step 3: Position Sizing

Size individual positions using these principles:

Principle	Application
Core-satellite	60–80% in diversified core (index/ETF), 20–40% in conviction satellite positions
Maximum single position	Conservative: 3%, Moderate: 5%, Aggressive: 8%
Sector concentration limit	No sector > 25% of equity allocation
Correlation awareness	Avoid holding highly correlated positions in the satellite
Minimum position size	At least $1,000 per position (practical for commissions and rebalancing)

Step 4: Estimate Risk and Return

For the proposed portfolio, calculate:

Metric	Description
Expected annual return	Weighted average of asset class expected returns
Expected volatility	Portfolio standard deviation using correlation matrix
Sharpe ratio	(Expected return − risk-free rate) / volatility
Maximum drawdown estimate	Historical worst-case scenario for this allocation
Value at Risk (95%)	1-year loss threshold at 95% confidence
Sortino ratio	Downside deviation-adjusted return

See references/portfolio-construction-framework.md for capital market assumptions and correlation data.

Step 5: Downside Protection

Design downside protection appropriate to the risk profile:

Risk Profile	Protection Strategies
Conservative	Higher cash buffer, shorter duration bonds, defensive sector tilt, dividend focus
Moderate	Diversification across asset classes, rebalancing discipline, some defensive allocation
Aggressive	Broader diversification as primary tool, tactical cash raises, stop-loss levels for concentrated positions

Step 6: Rebalancing Rules

Define a rebalancing strategy:

Method	Trigger	Pro	Con
Calendar	Quarterly / semi-annually	Simple, disciplined	May miss drift
Threshold	Asset class drifts ≥ 5% from target	Responsive	Requires monitoring
Hybrid	Quarterly check + 5% threshold override	Best of both	Slightly complex

Step 7: Present the Portfolio

Present using the structured format in references/output-template.md:

1. Portfolio Summary — Inputs, allocation, expected outcomes
2. Asset Allocation Chart — Visual breakdown by asset class and geography
3. Position Detail — Every holding with ticker, allocation %, dollar amount, rationale
4. Risk Dashboard — Expected return, volatility, Sharpe, max drawdown, VaR
5. Rebalancing Plan — Rules, triggers, execution guidance
6. Downside Protection — Strategies and stress-test scenarios
7. Income Projection (if applicable) — Expected yield and income stream
8. Implementation Guide — Order of operations for funding the portfolio
9. Disclaimers

Data Enhancement

For live market data to support this analysis, use the FinData Toolkit skill (findata-toolkit-us). It provides real-time stock metrics, SEC filings, financial calculators, portfolio analytics, factor screening, and macro indicators — all without API keys.

Important Guidelines

• Risk tolerance means different things: Ask clarifying questions — "aggressive" to a 25-year-old with $50K is different from "aggressive" to a 60-year-old with $50K. Time horizon, income needs, and loss tolerance all matter.
• No free lunch: Higher expected returns require accepting higher volatility. Make the tradeoff explicit.
• Fees matter: Recommend low-cost index ETFs for core positions. Note expense ratios and their impact on long-term compounding.
• Tax efficiency: In taxable accounts, consider tax-loss harvesting, asset location (bonds in tax-advantaged, equities in taxable), and qualified dividend preference.
• Behavioral guardrails: The best portfolio is one the investor can stick with. Don't recommend an aggressive allocation to someone who will panic-sell in a drawdown.
• Not personalized advice: Always disclaim that this is educational/illustrative and that individual circumstances require consultation with a qualified financial advisor.
• Rebalancing discipline: Emphasize that rebalancing is the primary risk management tool — it systematically buys low and sells high.