Answer: A twelve-month 95% value at risk of less than €1,000,000

## 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).

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