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:
- Portfolio Summary — Inputs, allocation, expected outcomes
- Asset Allocation Chart — Visual breakdown by asset class and geography
- Position Detail — Every holding with ticker, allocation %, dollar amount, rationale
- Risk Dashboard — Expected return, volatility, Sharpe, max drawdown, VaR
- Rebalancing Plan — Rules, triggers, execution guidance
- Downside Protection — Strategies and stress-test scenarios
- Income Projection (if applicable) — Expected yield and income stream
- Implementation Guide — Order of operations for funding the portfolio
- Disclaimers
Data Enhancement
For live market data, see references/data-queries.md and run the shared scripts in ../findata-toolkit/scripts/.
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.
1---2name: risk-adjusted-return-optimizer3description: 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.4license: Apache-2.05---67# Risk-Adjusted Return Optimizer89Act 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.1011## Workflow1213### Step 1: Gather Inputs1415Collect from the user (with defaults):1617| Input | Options | Default |18|-------|---------|---------|19| Portfolio size | Any dollar amount | $50,000 |20| Risk tolerance | Conservative / Moderate / Aggressive | Moderate |21| Time horizon | 1–30+ years | 10 years |22| Income needs | Yes (yield target) / No (total return) | No |23| Tax situation | Taxable / Tax-advantaged / Both | Taxable |24| Existing holdings | Positions to integrate or exclude | None |25| Constraints | ESG, sector exclusions, single-stock limits | None |26| Rebalancing preference | Calendar / Threshold / Hybrid | Threshold (5%) |2728### Step 2: Determine Asset Allocation2930Map risk tolerance and time horizon to a strategic asset allocation. See [references/portfolio-construction-framework.md](references/portfolio-construction-framework.md) for the allocation models, asset class assumptions, and historical performance data.3132| Risk Profile | Equities | Fixed Income | Alternatives | Cash |33|-------------|----------|-------------|-------------|------|34| Conservative | 30–40% | 40–50% | 5–10% | 5–10% |35| Moderate | 50–65% | 25–35% | 5–10% | 3–5% |36| Aggressive | 70–85% | 10–20% | 5–15% | 0–5% |3738Within each asset class, diversify across:3940- **Equities**: US large/mid/small, international developed, emerging markets, sector tilts41- **Fixed income**: Government, investment-grade corporate, TIPS, international bonds42- **Alternatives**: REITs, commodities, gold, alternatives (if appropriate for the profile)4344### Step 3: Position Sizing4546Size individual positions using these principles:4748| Principle | Application |49|-----------|------------|50| Core-satellite | 60–80% in diversified core (index/ETF), 20–40% in conviction satellite positions |51| Maximum single position | Conservative: 3%, Moderate: 5%, Aggressive: 8% |52| Sector concentration limit | No sector > 25% of equity allocation |53| Correlation awareness | Avoid holding highly correlated positions in the satellite |54| Minimum position size | At least $1,000 per position (practical for commissions and rebalancing) |5556### Step 4: Estimate Risk and Return5758For the proposed portfolio, calculate:5960| Metric | Description |61|--------|------------|62| Expected annual return | Weighted average of asset class expected returns |63| Expected volatility | Portfolio standard deviation using correlation matrix |64| Sharpe ratio | (Expected return − risk-free rate) / volatility |65| Maximum drawdown estimate | Historical worst-case scenario for this allocation |66| Value at Risk (95%) | 1-year loss threshold at 95% confidence |67| Sortino ratio | Downside deviation-adjusted return |6869See [references/portfolio-construction-framework.md](references/portfolio-construction-framework.md) for capital market assumptions and correlation data.7071### Step 5: Downside Protection7273Design downside protection appropriate to the risk profile:7475| Risk Profile | Protection Strategies |76|-------------|----------------------|77| Conservative | Higher cash buffer, shorter duration bonds, defensive sector tilt, dividend focus |78| Moderate | Diversification across asset classes, rebalancing discipline, some defensive allocation |79| Aggressive | Broader diversification as primary tool, tactical cash raises, stop-loss levels for concentrated positions |8081### Step 6: Rebalancing Rules8283Define a rebalancing strategy:8485| Method | Trigger | Pro | Con |86|--------|---------|-----|-----|87| Calendar | Quarterly / semi-annually | Simple, disciplined | May miss drift |88| Threshold | Asset class drifts ≥ 5% from target | Responsive | Requires monitoring |89| Hybrid | Quarterly check + 5% threshold override | Best of both | Slightly complex |9091### Step 7: Present the Portfolio9293Present using the structured format in [references/output-template.md](references/output-template.md):94951. **Portfolio Summary** — Inputs, allocation, expected outcomes962. **Asset Allocation Chart** — Visual breakdown by asset class and geography973. **Position Detail** — Every holding with ticker, allocation %, dollar amount, rationale984. **Risk Dashboard** — Expected return, volatility, Sharpe, max drawdown, VaR995. **Rebalancing Plan** — Rules, triggers, execution guidance1006. **Downside Protection** — Strategies and stress-test scenarios1017. **Income Projection** (if applicable) — Expected yield and income stream1028. **Implementation Guide** — Order of operations for funding the portfolio1039. **Disclaimers**104105## Data Enhancement106107For live market data, see `references/data-queries.md` and run the shared scripts in `../findata-toolkit/scripts/`.108109## Important Guidelines110111- **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.112- **No free lunch**: Higher expected returns require accepting higher volatility. Make the tradeoff explicit.113- **Fees matter**: Recommend low-cost index ETFs for core positions. Note expense ratios and their impact on long-term compounding.114- **Tax efficiency**: In taxable accounts, consider tax-loss harvesting, asset location (bonds in tax-advantaged, equities in taxable), and qualified dividend preference.115- **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.116- **Not personalized advice**: Always disclaim that this is educational/illustrative and that individual circumstances require consultation with a qualified financial advisor.117- **Rebalancing discipline**: Emphasize that rebalancing is the primary risk management tool — it systematically buys low and sells high.
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