The principles to be applied for the choice between relative and absolute VaR;
http://www.esma.europa.eu/system/files/10_788.pdf


Relative VaR or Earnings-at-Risk (EaR)
As described in the absolute VaR section, Mean Zero Absolute VaR assumes expected returns are Normal, which implies a mean of zero.
The final VaR which is a de-facto one-day absolute VaR does not take into account the portfolio mean returns (see Daily Earnings at Risk or DEaR) which assumes volatility is stationary (=no drift).

Relative Var

Value at Risk (VaR) is computed as the value at a chosen percentile p where q is the p-th quantile



Relative VaR or Earnings at Risk, as it is commonly known, is designed around one simple concept:

Instead of assuming the position's mean is zero,

Absolute VaR=( 0 - Portfolio Volatility)*Confidence.

we compute the average mean of the portfolio which we incorporate into our volatility / Value-at-Risk computation.

Relative VaR=( Portfolio Mean Expected Return - Portfolio Volatility)*Confidence.

So, instead of assuming risk as pure volatility, we incorporate expected returns.

When discussing relative VaR, most practitioners tend to emphasize the mean expected return of the portfolio from which scaled volatility will be deducted in order to obtain Value-at-Risk.

As mentioned above, the mean zero assumption affects different parts of the VaR computation. As such, a consistent framework must accommodate these same points with a mean expected return:

http://www.financial-risk-manager.com/risks/market/relativev...
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