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CFA Level I · CFA Level I Exam · Portfolio Management: An Overview

A client's IPS specifies a required return of 6.0% annually, with inflation expected at 2.5% and a spending need of 3.0% of assets per year. Which of the following return objectives is most likely a relative rather than an absolute objective?

Outperforming a 60/40 equity-bond benchmark by 1.0% is a relative return objective because it is measured against a benchmark. Targets such as earning 6.0% a year or a 3.5% real return are stated as fixed amounts, so they are absolute objectives.

  1. AEarn at least 6.0% each year
  2. BOutperform a 60/40 equity-bond benchmark by 1.0%Correct
  3. CEarn a real return of 3.5% each year

Explanation

A relative return objective is defined against a benchmark or index. Outperforming a 60/40 benchmark by 1.0% is relative. The other two state a fixed nominal or real return target, which are absolute objectives.

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