Answer: Tracking risk

## Explanation **Tracking risk** (also known as tracking error) is the correct answer because: 1. **Relative risk objectives** in an Investment Policy Statement (IPS) typically refer to risk measured relative to a benchmark or index, rather than absolute risk measures. 2. **Tracking risk** specifically measures the standard deviation of the difference between a portfolio's returns and its benchmark's returns. This quantifies how much a portfolio's performance deviates from its benchmark, making it ideal for relative risk objectives. 3. **Value at Risk (VaR)** is an absolute risk measure that estimates the maximum potential loss over a specific time period at a given confidence level. It doesn't measure performance relative to a benchmark. 4. **Standard deviation of returns** is also an absolute risk measure that quantifies the total volatility of a portfolio's returns, not its deviation from a benchmark. In portfolio management, when clients have relative risk objectives (e.g., "don't underperform the benchmark by more than 2% annually"), tracking risk is the appropriate metric to quantify and monitor this objective.

Author: LeetQuiz .