to make tactical asset allocation adjustments. II For nondomestic assets, whether to hedge foreign currency risk. Chapters 11 through 15 will have much more to say about developing the portfolio implementation plan. Once the asset allocation and risk budget are in place, the final and ongoing step in portfolio construction is the process of updating the implementation of the plan and monitoring adherence to the plan. This process includes rebalancing different components of the portfolio, reviewing the allocations of external portfolio managers and funds, and adjusting investments for cash flows into or out of the portfolio. The process should also include a regular review of the risk budget to make sure it is on track, an occasional update of the strategic asset allocation benchmark, and finally the monitoring of whether to terminate existing managers and whether to hire new ones. Risk management is an important aspect of the process of monitoring adherence of a portfolio to the investment plan. As noted above, the primary role of risk management is not to minimize risk, but to make sure the portfolio is on track relative to the asset allocation benchmark and the risk budget. If a manager or some aspect of the investment plan is creating unexpected risk or unusual performance, it is the role of the risk management function to identify, understand, and, if necessary, correct the situation. The risk management function could just as well identify a portfolio that is taking too little risk relative to the budget as find one that is taking too much risk. A portfolio that has a risk allocation that it is not using is not only wasting a scarce resource, the opportunity to use risk to generate returns; it is also likely to be charging fees that are not being earned. There are many dimensions of risk. We have been focusing on market risk, the term used to describe the gains and losses that can arise from changes in the valuations of securities. For example, changes in the value of a portfolio due to a decline in the general level of valuations in the equity market constitute a form of market risk. Other types of risk that need to be managed include the following: II Credit risk-the risk of loss due to the default of a counterparty. II Legal risk-the risk of loss due to a contract dispute, a lawsuit, or illegal activity. II Operational risk-the risk of loss due to a problem in clearing or settlement of securities or contracts. II Liquidity risk-the risk of loss due to the inability to dispose of securities or contracts in a timely manner Different approaches are required to monitor these various types of risk. Market risk is somewhat special in that quantitative models play a key role in monitoring market risk. Credit risk also requires quantitative models, but qualitative judgments play a larger role. Qualitative approaches are the key in evaluating the other types of portfolio risk, though quantitative approaches are becoming more and more common in areas such as liquidity risk and operational risk. The role of risk management in investment management is often misunderstood, in part because the discipline of risk management in financial institutions has grown rapidly in recent years, particularly in banks and securities firms with a