{"id":2920,"date":"2019-09-01T11:00:00","date_gmt":"2019-09-01T11:00:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2920"},"modified":"2026-03-26T07:50:41","modified_gmt":"2026-03-26T07:50:41","slug":"risk-return-objectives","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/","title":{"rendered":"Risk and Return Objectives"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Basics of Portfolio Planning and Construction (2024\/2025 Level I CFA\u00ae Exam \u2013 PM \u2013 Module 4)\",\n  \"description\": \"This video lesson covers the basics of portfolio planning and construction, focusing on the investment policy statement (IPS), risk and return objectives, and investor risk tolerance. It also addresses investment constraints, asset class specification, ESG integration, and the principles of asset allocation within the IPS framework.\",\n  \"uploadDate\": \"2022-07-06T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/hh4LeaTMl5Q\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/hh4LeaTMl5Q\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/hh4LeaTMl5Q\",\n  \"duration\": \"PT48M55S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following best demonstrates an absolute risk objective and a relative return objective?\",\n    \"text\": \"Which of the following best demonstrates an absolute risk objective and a relative return objective?\\n\\nA. Target a maximum annual portfolio volatility of 1.5x the S&P 500 and returns of \u00b14% of the S&P 500 annual return.\\nB. Target a maximum portfolio drawdown of 10% with 95% confidence and annual returns of 12%.\\nC. Target a maximum portfolio loss of $100,000 with 95% confidence and annual returns within 2% of the MSCI World Index.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C. An absolute risk objective targets a fixed loss amount (e.g., $100,000) with a given level of confidence, while a relative return objective compares the returns to an index (e.g., the MSCI World Index).\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/hh4LeaTMl5Q?si=DnXhkX7rbxbJhdMZ\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>The investment objectives and investment constraints are arguably the key components of the IPS. The two elements outline the risk and return objectives. Return objectives and expectations must be consistent with the risk objectives and constraints that apply to a portfolio.<\/p>\n<div style=\"text-align: center; margin: 25px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 10px 18px; border: 2px solid #1a73e8; border-radius: 999px; color: #1a73e8; text-decoration: none; font-weight: 500; background-color: #f5f9ff; white-space: nowrap;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Practice risk and return objectives with a free trial <\/a><\/div>\n<h2><strong>Risk Objectives<\/strong><\/h2>\n<p>The IPS should clearly state a client&#8217;s risk tolerance. Risk objectives are the specifications for portfolio risk and can be stated as absolute or relative measures using quantitative metrics. Absolute metrics may be around the probability of loss of portfolio capital over a particular time frame, whereas relative risk objectives would key off a particular benchmark, such as the S&amp;P 500 or LIBOR, to measure risk. For institutional clients, the benchmark may be linked to some kind of liability the institution has. For instance, a pension plan must be able to meet its payment obligations when they are due. When a policy portfolio has been specified, the risk objective may be for the portfolio to remain within a certain bandwidth around that policy allocation.<\/p>\n<p>A client&#8217;s overall risk tolerance is a function of their ability to bear risk and their willingness to take on risk. When there is consistency between risk willingness and ability, the investment task is made easier. Where the two are in conflict, the advisor should seek to explain the conflict and its implications. However, they should not aim to try and change the client&#8217;s willingness to take a risk if the decision is not a result of misperception. The prudent approach is to reach a conclusion about risk tolerance that is the lower of the two factors \u2013 ability and willingness.<\/p>\n<h2><strong>Return Objectives<\/strong><\/h2>\n<p>Return objectives may be stated on an absolute or relative basis. An absolute return objective may state the desired returns in nominal or real terms while a relative return objective could be an outperformance, relative to an index or even a peer group. However, a good benchmark should be investable and have the capacity to make return objectives relative to peers or other managers and institutions less appropriate.<\/p>\n<p>The return objective should be clearly classified either as before or after fees and pre or post-tax. The return objective must be consistent with the client&#8217;s risk objective and appropriate with respect to the market and economic environment.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following best demonstrates an absolute risk objective and a relative return objective?<\/p>\n<p>A. Target a maximum annual portfolio volatility of 1.5x the S&amp;P 500 and returns of \u00b14% of the S&amp;P 500 annual return.<\/p>\n<p>B. Target a maximum portfolio drawdown of 10% with 95% confidence and annual returns of 12%.<\/p>\n<p>C. Target a maximum portfolio loss of $100 000 with 95% confidence and annual returns within 2% of the MSCI World Index.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>C<\/strong>.<\/p>\n<p>An absolute objective does not key off a benchmark or index whereas a relative objective is with respect to a benchmark, index or peer group.<\/p>\n<\/blockquote>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 20px; border-radius: 999px; background-color: #1a73e8; color: #ffffff; text-decoration: none; font-weight: 600;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\n<p style=\"font-size: 15px; margin-top: 12px; color: #555;\">Learn how risk objectives are defined based on an investor\u2019s ability and willingness to take risk, how they are expressed in absolute or relative terms, and how they must align with return objectives in CFA Level I portfolio management.<\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>The investment objectives and investment constraints are arguably the key components of the IPS. The two elements outline the risk and return objectives. Return objectives and expectations must be consistent with the risk objectives and constraints that apply to a&#8230;<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7],"tags":[],"class_list":["post-2920","post","type-post","status-publish","format-standard","hentry","category-portfolio-management","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Risk and Return Objectives | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Risk-return objectives guide portfolio decisions, balancing relative return goals with risk tolerance. Learn how benchmarks measure relative risk objectives.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Risk and Return Objectives | CFA Level 1 - AnalystPrep\" \/>\n<meta property=\"og:description\" content=\"Risk-return objectives guide portfolio decisions, balancing relative return goals with risk tolerance. Learn how benchmarks measure relative risk objectives.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-01T11:00:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-03-26T07:50:41+00:00\" \/>\n<meta name=\"author\" content=\"admin\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"admin\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/\"},\"author\":{\"name\":\"admin\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251\"},\"headline\":\"Risk and Return Objectives\",\"datePublished\":\"2019-09-01T11:00:00+00:00\",\"dateModified\":\"2026-03-26T07:50:41+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/\"},\"wordCount\":537,\"articleSection\":[\"Portfolio Management\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/\",\"name\":\"Risk and Return Objectives | CFA Level 1 - AnalystPrep\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2019-09-01T11:00:00+00:00\",\"dateModified\":\"2026-03-26T07:50:41+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251\"},\"description\":\"Risk-return objectives guide portfolio decisions, balancing relative return goals with risk tolerance. Learn how benchmarks measure relative risk objectives.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Risk and Return Objectives\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251\",\"name\":\"admin\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g\",\"caption\":\"admin\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/admin\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/hh4LeaTMl5Q\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"2936\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2019-09-01T11:00:00+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Risk and Return Objectives | CFA Level 1 - AnalystPrep","description":"Risk-return objectives guide portfolio decisions, balancing relative return goals with risk tolerance. Learn how benchmarks measure relative risk objectives.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/","og_locale":"en_US","og_type":"article","og_title":"Risk and Return Objectives | CFA Level 1 - AnalystPrep","og_description":"Risk-return objectives guide portfolio decisions, balancing relative return goals with risk tolerance. Learn how benchmarks measure relative risk objectives.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-09-01T11:00:00+00:00","article_modified_time":"2026-03-26T07:50:41+00:00","author":"admin","twitter_card":"summary_large_image","twitter_misc":{"Written by":"admin","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/"},"author":{"name":"admin","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251"},"headline":"Risk and Return Objectives","datePublished":"2019-09-01T11:00:00+00:00","dateModified":"2026-03-26T07:50:41+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/"},"wordCount":537,"articleSection":["Portfolio Management"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/","name":"Risk and Return Objectives | CFA Level 1 - AnalystPrep","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-09-01T11:00:00+00:00","dateModified":"2026-03-26T07:50:41+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251"},"description":"Risk-return objectives guide portfolio decisions, balancing relative return goals with risk tolerance. Learn how benchmarks measure relative risk objectives.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/risk-return-objectives\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Risk and Return Objectives"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/78444b55b561e9abfb993836133a1251","name":"admin","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/?s=96&d=mm&r=g","caption":"admin"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/admin\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/hh4LeaTMl5Q","og_video_type":"text\/html","og_video_duration":"2936","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2019-09-01T11:00:00+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/2920","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=2920"}],"version-history":[{"count":32,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/2920\/revisions"}],"predecessor-version":[{"id":59976,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/2920\/revisions\/59976"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=2920"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=2920"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=2920"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}