Which statement best contrasts the defined limits approach with the defined standards approach?

• A. Defined standards approach uses greater flexibility with a prudent person standard
• B. Defined limits approach sets asset limits for asset classes; defined standards approach allows more flexibility with a prudent plan
• C. The defined limits approach sets asset limits and the defined standards approach allows more flexibility with a prudent plan
• D. The two approaches are unrelated

Answer: (C)

The main idea is the difference between fixed controls versus plan-based prudence. In a defined limits approach, asset allocations are anchored by explicit limits for each asset class, which creates clear constraints to control risk and maintain diversification. In contrast, a defined standards approach uses standards that guide risk and objectives but does not impose rigid caps on asset classes. Instead, you must craft a prudent plan and show that your strategy, given those standards, is sound and capable of meeting goals. This plan-based approach lets you adjust the asset mix as conditions change while still staying within the overall standards. So, the best statement is that the defined limits approach sets asset limits, while the defined standards approach allows more flexibility with a prudent plan.