Answer: An annual tracking risk of less than 2 percent

## 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.

Author: LeetQuiz .