Explanation

Correct Answer: A

Why Option A is correct:

1. Relative risk objectives are expressed relative to a benchmark or index. Tracking risk (also known as tracking error) measures the standard deviation of the difference between a portfolio's returns and its benchmark's returns.

2. Tracking risk of less than 2 percent is a relative measure because it compares the portfolio's performance to a benchmark, not an absolute measure of risk.

Why Option B is incorrect:

• Value at Risk (VaR) is an absolute risk measure that estimates the maximum potential loss over a specified time period at a given confidence level. A VaR of less than $1,000,000 is an absolute risk objective, not a relative one.

Why Option C is incorrect:

• Maintaining cash for planned withdrawals is a liquidity requirement or cash flow objective, not a risk objective. It addresses the portfolio's ability to meet cash needs rather than measuring risk relative to a benchmark.

Key Concepts:

• Relative Risk Objectives: Measure risk relative to a benchmark (e.g., tracking error, information ratio, relative VaR)
• Absolute Risk Objectives: Measure risk in absolute terms (e.g., standard deviation of returns, absolute VaR, maximum drawdown)
• IPS Components: Risk objectives in an Investment Policy Statement (IPS) can be either absolute or relative, and distinguishing between them is crucial for proper portfolio construction and performance evaluation.