For example, if the investment strategy determines that the overall weighted average maturity of the portfolio should not exceed one year and that the portfolio should only contain money markets and short-term U.S. Treasuries, perhaps one of the constant maturity Treasury benchmarks would be appropriately targeted. The point of selecting comparable benchmarks and measuring performance relative to that benchmark is to identify risk. If the performance of an organization's portfolio is far higher than a comparable benchmark, this should be an indication of possible risk-taking in the program. Should the portfolio's return fall far below the benchmark return, perhaps the program is being managed far too conservatively. Another facet of the review process is to ensure that the portfolio is adequately diversified and not too concentrated in a particular security-type, a particular maturity range on in a particular issuer name.
Proper diversification allows a portfolio to spread and mitigate risk.