Abstract: Fuzzy logic can be used when knowledge is
incomplete or when ambiguity of data exists. The purpose of
this paper is to propose a proactive fuzzy set- based model for
reacting to the risk inherent in investment activities relative to
a complete view of portfolio management. Fuzzy rules are
given where, depending on the antecedents, the portfolio size
may be slightly or significantly decreased or increased. The
decision maker considers acceptable bounds on the proportion
of acceptable risk and return. The Fuzzy Controller model
allows learning to be achieved as 1) the firing strength of each
rule is measured, 2) fuzzy output allows rules to be updated,
and 3) new actions are recommended as the system continues
to loop. An extension is given to the fuzzy controller that
evaluates potential financial loss before adjusting the
portfolio. An application is presented that illustrates the
algorithm and extension developed in the paper.