ability to meet its ROE and RORC targets. If excessive risk is used, unacceptable levels of loss may result. If too little risk is spent, unacceptable shortfalls in earnings may result. Risk monitoring is required to ensure that material deviations from risk budget are detected and addressed in a timely fashion. RISK MONITORING-RATIONALE AND ACTIVITIES There is an increasing sense of risk consciousness among and within organizations. This risk consciousness derives from several sources: II Banks that lend to investors increasingly care about where assets are placed. II Boards of investment clients, senior management, investors, and plan sponsors are more knowledgeable of risk matters and have a greater awareness of their oversight responsibilities. Especially as investments become more complicated, there is an increasing focus to ensure that there is effective oversight over asset management activities-whether such activities are managed directly by an organization or delegated to an outside asset manager. II Investors themselves are expected to have more firsthand knowledge about their investment choices. Perhaps this has been driven, in part, by the notoriety of losses incurred by Procter & Gamble, Unilever, Gibson Greeting Cards, Orange County (California), the Common Fund, and others. After these events, organizations have become interested in stresses and the portfolio's behavior in more unusual environments. Further, in the asset management world, asset managers increasingly must be able to explain, ex ante, how their products will fare in stressful environments. This enhanced client dialogue disclosure is beneficial from two perspectives: First, it raises the level of client confidence in the manager. Second, it reduces the risk of return litigation arising from types of events that were predictable on an ex ante basis. In response to this heightened level of risk consciousness, many organizations and asset managers have formed independent risk management units (RMUs) that oversee the risk exposures of portfolios and ensure that such exposures are authorized and in line with risk budgets. This trend was definitely spurred on by a highly influential paper authored by the Working Group10 in 1996. 10The Working Group was established in April 1996 by 11 individuals from the institutional investment community. Its mission was: "To create a set of risk standards for institutional investment managers and institutional investors." In drafting the final standards, opinions were solicited from a wide range of participants in the financial community including asset managers, academics, plan sponsors, custodians, and regulators. More recently, Paul Myn-ers, in his report (dated March 6, 2001) addressed to the Chancellor of the Exchequer of the United Kingdom entitled Institutional Investment in the United Kingdom-A Review, argued persuasively for the increased need for professional development and product understanding of those individuals charged with overseeing pension plans.