Best Practice of the Week Using Benchmarks to Assess Portfolio Risk and Return
GFOA Newsletter: May 7, 2015
State and local government finance officers take the management of investment risk very seriously. GFOA recommends that government investors assess their investment portfolio for performance and risk by comparing the total return of the portfolio to carefully selected benchmarks. This measure provides a complete snapshot of the outcomes resulting from investment decisions, according to the GFOA best practice, Using Benchmarks to Assess Portfolio Risk and Return. Any total return measurement that is much greater or much less than that of the benchmark should be analyzed, as significant deviations between the total return measurement and the benchmark often correlate with the portfolio risk profile. To provide a valid reference, the benchmarks chosen should closely resembles policy constraints and management practice in terms of duration, maturity range, average duration, security types, sector allocations, and credit quality.