Which investing strategy would prioritize matching the characteristics of assets and liabilities closely?

The correct answer emphasizes Liability-Driven Investment (LDI) as a strategy that focuses on closely matching the characteristics of assets and liabilities. LDI is particularly important for institutions such as pension funds and insurance companies, where the objective is to ensure that the investment portfolio is structured in a way that effectively meets future liability obligations.

In LDI, the investment strategy is specifically designed to align with the timing, amount, and nature of the liabilities. This often involves investing in fixed income securities that correspond to the payment schedules of the liabilities. For instance, if a pension plan has liabilities due in a specified timeframe, LDI would focus on acquiring assets that mature around the same time. This helps to mitigate risks such as interest rate fluctuations, ensuring that the funds are available when needed to cover the liabilities.

The other investment strategies do not prioritize matching assets and liabilities to the same extent. Active management focuses on outperforming a benchmark through strategic asset selection and timing, growth investing targets companies expected to grow at an above-average rate without specifically considering their liabilities, while income investing is primarily centered on generating a steady income stream through dividends or interest without the direct emphasis on liability matching. Thus, LDI stands out as the strategy that is uniquely designed to address liabilities directly in