Carol Kynnersley is the chief risk officer at Investment Management Advisers (IMA).Kynnersley meets with IMAs portfolio management team and investment advisers to discuss the methods used to measure and manage market risk and how risk metrics are presented in client reports. The three most popular investment funds offered by IMA are the Equity Opportunities, the Diversified Fixed Income, and the Alpha Core Equity. The Equity Opportunities Fund is composed of two exchange- traded funds: a broadly diversified large- cap equity product and one devoted to energy stocks. Kynnersley makesthe following statements regarding the risk management policies established for theEquity Opportunities portfolio: Statement 1 IMAs preferred approach to model value at risk (VaR) is to estimate expected returns, volatilities, and correlations under the assumption of a normal distribution. Statement 2 In last years annual client performance report, IMA stated that a hypothetical $6 million Equity Opportunities Fund account had a daily 5% VaR of approximately 1.5% of portfolio value. Kynnersley informs the investment advisers that the risk management department recently updated the model for estimating the Equity Opportunities Fund VaR based on the information presented in Exhibit 1.

Exhibit 1 Equity Opportunities FundVaR Model Input Assumptions

Large- Cap ETF Energy ETF Total Portfolio

Portfolio weight 65.0% 35.0% 100.0%

Expected annual return 12.0% 18.0% 14.1%

Standard deviation 20.0% 40.0% 26.3%

Correlation between ETFs: 0.90Number of trading days/year: 250

For clients interested in fixed- income products, IMA offers the Diversified Fixed-Income Fund. Kynnersley explains that the portfolios bonds are all subject to interest rate risk. To demonstrate how fixed- income exposure measures can be used to identify and manage interest rate risk, Kynnersley distributes two exhibits featuring three hypothetical Treasury coupon bonds (Exhibit 2) under three interest rate scenarios(Exhibit 3).

Exhibit 2: Fixed- Income Risk Measure

Hypothetical Bond Duration

Bond 1 1.3

Bond 2 3.7

Bond 3 10.2

Exhibit 3: Interest Rate Scenarios

Scenario Interest Rate Environment

Scenario 1 Rates increase 25 bps

Scenario 2 Rates increase 10 bps

Scenario 3 Rates decrease 20 bps

One of the investment advisers comments that a client recently asked about the performance of the Diversified Fixed- Income Fund relative to its benchmark, a broad fixed- income index. Kynnersley informs the adviser as follows: Statement 3 The Diversified Fixed- Income Fund manager monitors the historical deviation between portfolio returns and benchmark returns. The fund prospectus stipulates a target deviation from the benchmark of no more than 5 bps. Kynnersley concludes the meeting by reviewing the constraints IMA imposes on securities included in the Alpha Core Equity Fund. The compliance department conducts daily oversight using numerous risk screens and, when indicated, notifies portfolio managers to make adjustments. Kynnersley makes the following statement: Statement 4 It is important that all clients investing in the fund be made aware of IMAs compliance measures. The Alpha Core Equity Fund restricts the exposure of individual securities to 1.75% of the total portfolio.

Question:In Statement 4, Kynnersley describes a constraint associated with a:

a. risk budget.

b. position limit.

c. stop- loss limit.