You can specify relative paths for your PDF documents but they have to be relative to the .xap file of your Silverlight application i.e. the HtmlPlaceholder cannot render documents embedded in your .xap file. Whatever path you set to the HtmlPlaceholder, you should be able to open it yourself in a browser. So, there is no need for the PDFs to be hosted remotely (on another server) - they can be part of the same web project that hosts your Silverlight application. Let me know if you have any other questions.
the Telerik team