are working as intended and no action is required. If realized risk is further from target (the yellow zone), the situation may require closer examination, and if realized risk is far from target (the red zone), some action is usually called for. Of course, we also use in-house systems to monitor sources of risk (as we do sources of return) to make sure we are not getting excessive risk from unintended sources, and that we are getting enough risk from our intended sources. Finally, it is important to monitor trading costs. Are they above or below the costs assumed when making trading decisions? Are they above or below competitors' costs? Are they too high in an absolute sense? If so, managers may need to improve their trade cost estimates, trading process, or both. There are many services that can report realized trade costs, but most are available with a significant lag, and are inflexible with respect to how they measure and report these costs. With in-house systems, however, managers can compare a variety of trade cost estimation techniques and get the feedback in a timely enough fashion to act on the results. The critical question, of course, is what to do with the results of these monitoring systems: When do variations from expectations warrant refinements to the process? This will depend on the size of the variations and their persistence. For example, a manager probably would not throw out a stock-selection signal after one bad month-no matter how bad-but might want to reconsider after many years of poor performance, taking into consideration the economic environment and any external factors that might explain the results. It is also important to compare the underperformance to historical simulations. Have similar periods occurred in the past, and if so, were they followed by improvements? In this case, the underperformance is part of the normal risk in that signal and no changes may be called for. If not, there may have been a structural change that might invalidate the signal going forward-for example, if the signal has become overly popular, it may no longer be a source of mispricing. Similarly, the portfolio manager needs to consider the source of any differences between expectations and realizations. For example, was underperformance due to faulty signals, portfolio constraints, unintended risk, or random noise? The answer will determine the proper response. If constraints are to blame, they may be lifted- but only if doing so would not violate any investment guidelines or incur excessive risk. Alternatively, if the signals are to blame, the manager must decide whether the deviations from expectations are temporary or more enduring. Finally, if it is just random noise, no action is necessary. Similarly, any differences between realized and expected risk could be due to poor risk estimates or poor portfolio construction, with the answer determining the response. Finally, excessive trading costs (versus expectations) could reflect poor trading or poor trade cost estimates, again with different implications for action. In summary, ongoing performance, risk, and trade cost monitoring is an integral part of the EPM process and should get equal billing with forecasting, portfolio construction, and trading. Monitoring serves as both quality control and a source of new ideas and process improvements. The more sophisticated the monitoring systems, the more useful they are to the process. And although the implications of monitoring involve subtle judgments and careful analysis, better data can lead to better solutions.