Liability-driven investing

Investing with the liabilities as the benchmark: a hedging portfolio matches their interest rate sensitivity, and a return-seeking portfolio aims to close any funding gap. Success is judged on the surplus.

Where you will meet it

Liability-driven investing appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain the approach known as liability-driven investing
  CFA Level III · Portfolio Construction

  “Liability-driven investing (LDI) builds the asset portfolio around the size, timing and interest-rate sensitivity of the liabilities it must fund, rather than around a market index.”

• Discuss the investment policy approaches adopted by institutional investors
  CFA Level III · Portfolio Construction

  “Liability-driven investing ties the portfolio to liabilities, typical of pensions and insurers, often with a hedging portfolio and a return-seeking portfolio.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with L · Glossary