error consequences of credit exposures imbedded in the securities held by the portfolio. In addition to quantifying security-specific and overall portfolio credit exposure, it is important that the RMU understand the credit consequences of dealing with brokers, custodians, execution counterparties, and the like. It is a truism that credit risk is frequently the other side of the coin of market risk. Discussions on market risk are often, at their heart, driven by credit matters. In certain asset classes (e.g., emerging markets) credit risk and market risk may be virtually inseparable. Further, since credit risk is an attribute of performance, it should also be an element of the risk process. As an example, many global indexes (e.g., IFC) now include emerging market countries. To the extent that financial systems in such countries (e.g., Egypt and Russia) are evolving and immature, institutions face credit risk when settling trades. The expected return on such transactions is a function not only of issuer-specific risk, but of credit/settlement risk as well. For this reason, the RMU should ensure that all counterparties used to execute and settle trades meet credit policy criteria. PERFORMANCE MEASUREMENT-TOOLS AND THEORY Until now, we have largely focused our attention on measuring potential risk- an estimate of the risk and return that is possible. The other side of this coin is measurement of realized outcomes. In theory, if the ex ante forecasts are meaningful, they should be validated by the actual outcomes experienced. In this sense, performance measurement might be thought of as a form of risk model validation. In general, the objectives of performance measurement tools are: II To determine whether a manager generates consistent excess risk-adjusted performance vis a vis a benchmark. II To determine whether a manager generates superior risk-adjusted performance vis a vis the peer group. II To determine whether the returns achieved are sufficient to compensate for the risk assumed in cost/benefit terms. II To provide a basis for identifying those managers whose processes generate high-quality excess risk-adjusted returns. We believe that consistently superior risk-adjusted performance results suggest that a manager's processes, and the resulting performance, can be replicated in the future, making the returns high-quality. Reasons That Support Using Multiple Performance Measurement Tools To calculate a risk-adjusted performance measure, two items must be known: