James Morgan
Monday, Feb, 09, 2026
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When yield isn’t the whole story
When evaluating an investment, it’s natural to focus on return. But return alone doesn’t tell the full story. What matters just as much is how much risk was taken to achieve it. That’s where risk-adjusted returns come in, allowing you to compare investments on a like-for-like basis.
A simple example
Imagine booking a long-overdue holiday to the Caribbean. You find two airlines offering the same ticket price and the same destination. One is a well-established carrier with a strong track record; the other has a reputation for cramped cabins, frequent delays, and operational hiccups (you know the one…).
You may still arrive in the same place, but the journey is materially different: one leaves you rested, on time, and ready to enjoy the trip; the other risks late arrivals, missed connections, and starting your holiday already exhausted. The destination is the same, but the experience and reliability of getting there are not.
Investments work the same way. Two options may offer identical returns, but the risks behind them can differ significantly. A better risk-adjusted return means earning a better return relative to the amount of risk taken.
Understanding credit risk
As a cash management professional, you’ll already be familiar with liquidity and credit risk – the risk that a borrower fails to meet their obligations. While these risks are well understood conceptually, they’re not always easy to measure.
That’s one of the reasons why TreasurySpring partners with the financial data and analytics firm, Credit Benchmark. Credit Benchmark aggregates internal credit assessments from over 40 major global banks to produce a 100-notch credit scale. Each notch maps directly to a borrower’s probability of default over the next 12 months, providing a clear, quantitative measure of credit risk.
TreasurySpring clients can access these ratings directly via the platform or by downloading a Credit Report. We make this available to you through the TreasurySpring so you have the tools you need to better assess your risks and make informed investment decisions. Our help centre article shows you how to access these reports.
Turning risk into decision-making
A credit rating alone is useful, but incomplete. It’s like a weather forecast that only tells you the chance of rain. What you really want to know is how likely it is, how bad it could be, and what that means for your holiday plans.
Like using the weather forecast to form part of your holiday planning, considering credit ratings data can be incorporated when considering expected returns.
Probability of Default (PD): the likelihood that a borrower defaults, inferred from the Credit Benchmark data you have access to.
Loss Given Default (LGD): how much you would lose if a default occurs.
Together, these create your Expected Loss = PD × LGD × Exposure.
Finally, RARAC (Risk-Adjusted Return on Allocated Capital) brings return back into the picture. It answers the key question: is the return worth the risk taken?
RARAC = (Total return − expected loss) ÷ Invested capital
Managing what you can control
Diversification is one approach, spreading exposures across countries, sectors, issuers, and other dimensions. In a globally connected world, however, correlations may still emerge and risk a systemic downturn even within broadly diversified portfolios.
Securing your exposure is an additional option and can complement a diversification strategy without sacrificing liquidity. TreasurySpring gives access to secured cash markets that were once reserved for the largest institutions and give a second source of recourse to mitigate losses.
In short: securing your investments is an additional tool for your cash management needs, and can enhance your risk adjusted returns. Let’s bring this to life with two simple examples. Same counterparty, same credit risk, just different ways of taking the journey.
Based on yield alone, the unsecured option looks more attractive. The return is higher, and if you stop there, it’s an easy choice. But once you consider what happens if something goes wrong and what you might be able to recover, it’s less clear – a smoother ride when markets get bumpy, just like flying with the airline you trust.
This article is for information and educational purposes only and does not constitute investment advice or a personal recommendation. All figures are illustrative only and do not guarantee future returns. Any investment decision should be based on your own assessment and, where appropriate, advice from a regulated adviser.