This article describes a set of mean–variance procedures for setting targets for the risk characteristics of components of a pension fund portfolio and for monitoring the portfolio over time to detect significant deviations from those targets. Because of the significant correlations of the returns provided by the managers of a typical defined-benefit pension fund, the risk of the portfolio cannot be characterized as simply the sum of the risks of the individual components. Expected returns, however, can be so characterized. I show that the relationship between marginal risks and implied expected excess returns provides the economic rationale for the risk budgeting and monitoring being implemented by a number of pension funds. I then show how a fund's liabilities can be taken into account to make the analysis consistent with goals assumed in asset/liability studies. I also discuss the use of factor models and aggregation and disaggregation procedures. The article concludes with a short discussion of practical issues that should be addressed when implementing a pension fund risk-budgeting and -monitoring system.