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Using Benchmarks to Assess Portfolio Risk and Return

GFOA Newsletter  April 6, 2017

Finance offices measure portfolio risk and return results against appropriate market benchmarks to verify that all the organization’s investment objectives are being met and that portfolio investment returns are appropriate, based on the level of risk incurred. Investment yield, which measures the percentage increase or decrease that a portfolio generates during a given period, isn’t enough to adequately assess risk and performance. Governments should look at both performance and risk, which can be done by comparing the total return of the portfolio to carefully selected benchmarks. Total return provides a complete snapshot of the outcomes resulting from investment decisions since it measures the percent change in the value of a portfolio over a defined historical period.

A valid reference for an investment portfolio should closely resemble your government’s policy constraints and management practice in terms of duration, maturity range, average duration, security types, sector allocations, and credit quality. The benchmark should also be unambiguous and transparent, investable, and priced on a regular basis. The government should adopt the chosen benchmark before the evaluation and use the same one consistently.

GFOA’s best practice, Using Benchmarks to Assess Portfolio Risk and Return, provides more information.

Managing an investment portfolio in today’s volatile financial markets requires sophisticated financial tools.