Liability-driven investing (LDI)

What it means

Managing a portfolio against the liabilities it must fund rather than against a market index.

The exam angle

Risk becomes the mismatch between asset and liability sensitivities, so a "safe" cash portfolio can be highly risky against long-dated liabilities.

Where it appears in the syllabus

• Asset AllocationCFA Level III · exam weight 15–20% · Capital market expectations, allocation principles, real-world constraints.
• Portfolio ConstructionCFA Level III · exam weight 15–20% · Equity and fixed-income portfolios, alternatives, institutions, trading costs.

Related terms

• Currency hedgingUsing forwards, futures or options to reduce a portfolio’s exposure to exchange rate movements on foreign assets.
• Efficient frontierThe set of portfolios offering the highest expected return for each level of risk.
• ImmunisationStructuring a bond portfolio so that price and reinvestment effects cancel, locking in a return over a horizon.
• RebalancingTrading back to target weights after market moves have shifted them.
• Reinvestment riskThe risk that coupons and principal must be reinvested at a lower rate than expected.
• Risk budgetingAllocating a portfolio’s total risk across strategies or managers, rather than allocating its capital.