being underexposed due to a low beta and being overexposed due to overallocation can run counter to one another. Finally, the stock selection risk represents the tracking error incurred after adjusting for beta effects in the relative movements of the portfolio vis-a-vis the benchmark, sector, and style exposures. A high ratio of security selection risk to total risk is typically a sign of high-quality risk taking. The underlying presumption is that managers can add value in security selection but that timing markets or making substantial sector or style bets is a much harder game to play. Therefore, high beta risk, sector, or style exposures can often bode ill for the plan's performance. The assumptions underlying the risk budget will invariably be tested and reanalyzed during the life of a plan. Understanding the differences in return and risk characteristics of the individual managers and how these compare with outside peers is also a key component of the process. Plans have a only finite capacity to take active risk. Given that active risk is seen as a scarce resource, the importance of monitoring the budget should not be underestimated. We highlighted throughout this discussion the need for plan sponsors to focus more attention on risk-adjusted measures as we believe risk-adjusted measures provide a much more robust framework than a performance-only based analysis. Also, a well defined and carefully thought out risk monitoring program predicated on risk-adjusted measures is a simple yet highly effective way to determine the efficacy of an investment program. While tools such as the Green Sheet and risk budget are samples of many available, the two combined can provide a powerful framework for monitoring aggregate plan risks. SUMMARY Plan risk should be thought of as a finite commodity to be used or spent intelligently across the spectrum of managers in the investment program as a means to maximizing expected return. The importance of risk-adjusted returns becomes more relevant in a risk budgeting framework since its underlying tools help us understand whether a program is being adequately rewarded for its active risks. These tools include the setting of tracking error zones for each manager and/or asset class in the program. This approach, known as the Green Zone, represents an alternative to monitor relative risk behavior, market conditions, and the level of control in the portfolio construction process. A related approach, known as the Green Sheet, summarizes tracking error and performance outcomes at the manager, asset class, and plan level on a 20-day, 60-day, and 12-month basis. These tools will unearth areas of risk taking that need further analysis or exploration while potentially triggering conversations with portfolio managers. They will also provide indirect feedback to the validity and soundness of the initial target-setting process. In a third approach, the risk budget decomposes the active risk incurred in the program, tracing it to mainly three sources: asset allocation, beta, and manager-specific risk. This tool streamlines the process of risk allocation by contrasting targets against realized risks. The attribution of risk is important given the paradigm