Portfolio Risk Assessment

When to use this skill

Use when the user asks about:

• Understanding their portfolio's overall risk level
• Identifying hidden risks or correlations
• Stress-testing their portfolio against market scenarios
• Reducing portfolio risk without sacrificing too much upside
• Evaluating whether their risk exposure matches their tolerance

Risk Assessment Framework

1. Concentration Risk

Analyze portfolio distribution:

• Single-asset concentration: Any position > 25% of portfolio is high concentration risk
• Sector concentration: Total exposure to a single sector (e.g., all DeFi tokens) shouldn't exceed 40%
• Chain concentration: Everything on one chain means single-point-of-failure risk (bridge hack, chain halt)
• Herfindahl Index: Calculate HHI = sum of squared weights. Below 0.15 = diversified, above 0.25 = concentrated

Risk Level	Characteristic
Low	No single asset > 15%, no sector > 30%, 3+ chains
Medium	One asset 15-25%, sector up to 40%, 2+ chains
High	One asset > 25%, sector > 40%, single chain
Critical	One asset > 50%, or all in one protocol

2. Correlation Analysis

Assess how positions move together:

• High correlation cluster: BTC, ETH, and most alts are highly correlated in drawdowns (correlation 0.7-0.95 during crashes)
• Diversification reality: Holding 10 different altcoins does NOT provide meaningful diversification if they all drop 60% together
• True diversification assets: Stablecoins, potentially BTC (lower beta during moderate corrections)
• Negative correlation: Stablecoins and short positions provide true hedge, but at a carry cost
• Correlation increases in crisis: Diversification benefits shrink exactly when you need them most

3. Volatility Risk Profile

Quantify the portfolio's volatility exposure:

• Weighted average volatility: Sum of (position weight * asset 30d annualized volatility)
• Maximum drawdown exposure: Estimate worst-case based on historical max drawdowns of each asset
• $Value at Risk: At 95% confidence over 24h, how much could the portfolio lose?
• Beta to BTC: How much does the portfolio move per 1% BTC move? Beta > 1.5 is aggressive

4. Leverage and Liquidation Risk

If the portfolio includes leveraged positions:

• Total leverage ratio: Sum of all positions / actual equity deployed
• Liquidation prices: For each leveraged position, what price triggers liquidation?
• Aggregate liquidation buffer: Minimum percentage drop across all positions before any liquidation fires
• Cross-margin risk: If positions share collateral, one liquidation can cascade
• Funding rate exposure: Net funding costs or earnings across perpetual positions

5. Protocol and Smart Contract Risk

Assess DeFi-specific risks:

• Protocol diversification: Don't put > 20% in any single protocol
• Audit status: List protocols used and their audit history
• Composability risk: Complex strategies stacking multiple protocols multiply risk (a bug in any layer fails the whole stack)
• Oracle dependency: Which oracle do your DeFi positions rely on? Single oracle failure cascades
• Bridge exposure: Funds currently on bridges or bridged chains

6. Stress Test Scenarios

Model portfolio impact under specific scenarios:

Scenario	BTC Impact	ETH Impact	Alt Impact	Portfolio
2022-style bear (gradual)	-65%	-70%	-85%	?
Flash crash (24h)	-30%	-35%	-50%	?
Stablecoin depeg	0%	-10%	-15%	?
Smart contract exploit	0%	0%	-100% (affected)	?
Regulatory crackdown	-20%	-25%	-40%	?

Calculate the dollar impact for each scenario using actual portfolio weights.

7. Risk Score Card

Risk Category	Score (1-10)	Weight	Weighted Score
Concentration		25%
Correlation		20%
Volatility		20%
Leverage		15%
Protocol/Smart contract		10%
Liquidity		10%
Overall Risk Score			X / 10

8. Output Format

• Overall risk level: Conservative / Moderate / Aggressive / Reckless
• Risk score: X / 10 (higher = more risk)
• Top 3 risks: Most critical vulnerabilities in the portfolio
• Worst-case scenario: Dollar loss in a severe downturn
• Risk-adjusted improvements: 3 specific changes to reduce risk while maintaining exposure
• Diversification grade: A through F
• Leverage assessment: None / Modest / Elevated / Dangerous
• Action items: Prioritized risk reduction steps