Explanation

Absolute risk objectives refer to risk measures that are expressed in absolute terms, independent of any benchmark or relative measure. They focus on the total risk of the portfolio itself.

Analysis of each option:

A. An annual tracking risk of less than 2 percent - This is a relative risk objective because tracking risk (also known as tracking error) measures the deviation of portfolio returns from a benchmark. It's relative to a benchmark, not absolute.

B. A twelve-month 95% value at risk of less than €1,000,000 - This is an absolute risk objective. Value at Risk (VaR) measures the maximum potential loss (in absolute currency terms) over a specified time horizon at a given confidence level. The €1,000,000 is an absolute monetary amount, not relative to any benchmark.

C. Maintaining at least €10,000 in cash for planned monthly withdrawals - This is a liquidity constraint or cash flow requirement, not a risk objective. It addresses the need for regular withdrawals rather than measuring portfolio risk.

Key distinction:

• Absolute risk: Measures total portfolio risk in absolute terms (e.g., standard deviation of returns, VaR in currency units)
• Relative risk: Measures risk relative to a benchmark (e.g., tracking error, active risk)
• Constraints: Liquidity needs, legal/regulatory requirements, tax considerations, etc.

Therefore, option B correctly describes an absolute risk objective for a client's portfolio in an Investment Policy Statement (IPS).