This lesson focuses on how to measure and evaluate the performance of a treasury investment portfolio.
6.1 Performance Metrics and Benchmarking
Treasury must be able to “manage investment portfolio” and “evaluate and implement treasury products” . Key performance metrics include:
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Return on Investment (ROI):Â The total return generated by the portfolio.
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Benchmarking:Â Comparing portfolio returns against a pre-defined benchmark, such as a short-term interest rate or a money market index .
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Risk-Adjusted Return:Â Evaluating performance relative to the amount of risk taken.
6.2 Risk and Return Concepts
A fundamental financial concept is the risk-return trade-off. Higher returns are generally associated with higher levels of risk. To measure this relationship, treasury professionals use statistical tools such as mean, variance, standard deviation, covariance, and correlation . Variance and standard deviation measure total risk; covariance and correlation measure diversification benefits .
6.3 Measurement and Reporting
Treasury must “calculate, analyze, and evaluate financial ratios to optimize financial decision making” . Regular reporting to management and the board is required to ensure accountability and compliance with the investment policy .