The benchmark portfolio is an investment with a risk level still suitable for the investor and the yield matching the investor's expectations.

The benchmark portfolio of Eesti Pank is a portfolio composed of the bond market indices of Citigroup Inc., which guarantees at least a positive quarterly result with a 95% probability. With this the key requirement established for the foreign exchange reserve - maintaining the assets - has been fulfilled.

The benchmark portfolio is also a passive strategy used in confusing situations where investors lack a clear vision of the future market developments. For instance, in cases where markets send mixed signals or if the signals are interpreted differently.

The key element of the interest rate market is the interest rate or income curve, which expresses the price of money with different maturities for borrowers, but also the profitability of invested money for investors. If the interest rate curve did not change during a year, the investors would earn exactly the income that met the maturity of their investments.

No one knows exactly how much interest rates with different maturities will change in the future. However, with a relatively great probability it is possible to estimate the range within which the occurring changes will remain. These ranges (standard deviations of expected distribution) can be determined based on historical data (assuming that market volatility remains the same) as well as by the option prices of the respective interest rate products (assuming that market changes correspond to forecasts).

The normative risk parameters of the foreign exchange reserve invested by Eesti Pank have been determined with this method.

In terms of risk, the optimum benchmark portfolio is distributed evenly on the income curve. In order to achieve the best yield the portfolio has been compiled of the weighted sub-indices of various market segments. This weighing depends on the changes in segments and the average offered yield (interest). When the market situation changes (interest rates increase/drop, the volatility increases/decreases), also the benchmark portfolio needs updating.