| Anticipated
returns must always be related to risk. The higher the risk, the higher
the return that should be generated. Figure 3 shows an example upon which
the risk and return spread of the portfolio might be modelled. Again,
this is from the ING portfolio management process, as developed by SeaQuation,
and is based on dummy data.
| |
From
this illustrative example the following observations may be made:
|
| - |
A
significant proportion of the portfolio is in the high- and maximum-risk
categories but with negative anticipated returns. Being discretionary
rather than mandatory projects, this begs the question of why they
are they being undertaken at all. Review of these projects is advised.
Perhaps the benefits have been understated and/or the risk overstated,
or perhaps they should never have been approved in the first place. |
| - |
There
are some projects in the high-risk and high-return categories. Depending
on the corporate appetite for risk, this is probably fine as some
high-risk projects are likely to form part of any balanced portfolio. |
| - |
The
low-risk and negative-return projects also should be reviewed for
their continued viability. |
| - |
Standard
financial services credit risk indicators of AAA, BBB, CCC and DDD
have been used. This demonstrates the advisability of using a common
language with which the users—in this case, financial services—are
familiar. |
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