CFA® glossary: L

39 terms beginning with L.

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Labour force

Everyone of working age who is either employed or unemployed and actively looking for work. Someone who stops looking leaves it altogether rather than remaining unemployed. Where it appears →

Large language model

A deep neural network trained on vast amounts of text to predict the next token. Fluency follows from that training and accuracy does not, so any figure it states needs checking against the source. Where it appears →

Lasso

Penalised regression adding a penalty on the sum of absolute coefficients, which shrinks weak ones to exactly zero and so selects features as the model is fitted. The penalty's size is a hyperparameter.

Law of one price

The principle that identical or closely similar assets should sell at the same price. It underlies valuation by comparables and, for goods across countries, purchasing power parity.

Leading indicator

An economic series that tends to turn before the wider economy does, such as new orders, building permits or the slope of the yield curve. Quick to signal a turning point, but prone to false alarms. Where it appears →

Lemmatisation

Reducing words to their dictionary form, such as 'be' for is and was, so variants count as one token. More accurate than stemming, and more costly to run. Where it appears →

Leptokurtic

Having fatter tails than the normal distribution, that is positive excess kurtosis. Typical of asset returns, so risk measures built on normality understate how often large losses occur.

Leverage-adjusted duration gap

Asset duration minus liability duration scaled by liabilities over assets: DA − (L ÷ A) × DL. It shows how a financial institution's equity responds to rates; positive means equity falls when rates rise.

Leveraged buyout

The purchase of a company funded largely with debt secured on its own assets and cash flows. The borrowing magnifies the equity return on any improvement in the business, and the loss on any decline. Where it appears →

Leveraged recapitalisation

Borrowing heavily to buy back shares or pay a special dividend, shifting the capital structure towards debt. It may lower the cost of capital through the tax shield, but raises financial risk. Where it appears →

Liability-based benchmark

A benchmark portfolio, often of high-quality bonds, whose value moves with the investor's liabilities. It tests whether the assets kept pace with what is owed, not with a market index.

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 it appears →

Life cycle

The phases an industry passes through — embryonic, growth, shakeout, mature and declining — each with typical growth, competition and profitability. A guide to what tends to happen, not a timetable. Where it appears →

Life settlement

Buying an existing life insurance policy from the insured for more than its surrender value, then paying the premiums and collecting the death benefit. Returns fall the longer the insured lives. Where it appears →

Lifo reserve

The difference between a LIFO and a FIFO inventory valuation, disclosed in the notes so a reader can undo the method before comparing two firms. Where it appears →

Limit order

An order with a price bound. It buys certainty about the price at the cost of possibly never executing — and not trading is itself a position.

Limited liability

Owners' losses being capped at what they invested, with their personal assets beyond the reach of the business's creditors. It is what lets outside investors own shares in firms they do not run. Where it appears →

Limited partner

A partner whose liability is capped at what it contributed, in return for no part in management. In a private fund it is the investor, committing capital it can rarely get back before the fund ends. Where it appears →

Line of credit

A bank facility a borrower can draw on up to a limit as needed. A committed line obliges the bank to lend, for a fee; an uncommitted one can be withdrawn at the bank's discretion. Where it appears →

Liquidation preference

A preferred shareholder's right, on a sale or wind-up, to be paid a set multiple of its investment before common shareholders get anything. If non-participating, it takes that amount or converts, whichever is worth more.

Liquidation value

What a business's assets would raise if it stopped trading and sold them, less its liabilities and the costs of selling. Usually below going concern value, and a floor for a failing company. Where it appears →

Liquidity

How quickly something can be turned into cash without moving its price. Scarce exactly when it is most wanted. Where it appears →

Liquidity coverage ratio

High-quality liquid assets divided by expected net cash outflows over 30 days of stress. Basel III requires at least 100%, so a bank can survive a month-long run.

Litigation finance

Paying a claimant's legal costs in return for a share of any award or settlement. Returns depend on how cases end, so they have little to do with markets but are all-or-nothing and slow. Where it appears →

Local currency debt

Sovereign debt in the government's own currency. A sovereign with its own central bank can always create money to service it, so the risk to holders shifts from default towards inflation.

Local expectations theory

The view that every bond, whatever its maturity, earns the risk-free rate over a short holding period. Unlike pure expectations, it allows risk premiums over longer horizons.

Lock-up

A period during which capital cannot be withdrawn from a fund, or shares held by insiders cannot be sold. For a fund investor it is the constraint an illiquidity premium is meant to compensate. Where it appears →

Lockout period

The revolving phase of a credit card securitisation, when principal collections buy new receivables instead of being paid to investors. It gives a security backed by revolving balances a set term.

Log odds

The natural log of p ÷ (1 − p), where p is a probability. It runs from minus to plus infinity, which is what lets logistic regression model it as a straight line.

Log-linear trend

A trend model of the log of a series, ln y = b0 + b1 × t, implying growth at a constant rate. Forecasts are converted back to the original units by raising e to the fitted value. Where it appears →

Logistic regression

A regression for a yes-or-no outcome that models the log odds as linear in the variables, so predicted probabilities stay between 0 and 1. Estimated by maximum likelihood rather than least squares. Where it appears →

Lognormal distribution

The distribution of a variable whose natural logarithm is normally distributed. Bounded below at zero and skewed right, it suits asset prices, which cannot go negative but have no upper limit. Where it appears →

Lognormal model

A model of interest rates in which neighbouring rates at a date differ by a factor of e raised to 2σ. Rates cannot go negative, and their volatility rises with their level.

Long straddle

Buying a call and a put at the same strike and expiry, a bet on a large move in either direction. The loss is limited to the two premiums, which time decay erodes if the price sits still.

Long-run aggregate supply

Output supplied once all wages and prices have adjusted, vertical at potential output. Demand can move only the price level along it; raising it takes more labour, capital or productivity.

Longevity risk

The risk of living longer than planned and so outliving one's assets or, for a pension plan or insurer, paying benefits for longer than expected. A lifetime annuity transfers it to an insurer. Where it appears →

Look-ahead bias

Using information in a test that was not available at the time being tested, such as a model trained on text written after the backtest period. It makes a strategy look better than it could have been. Where it appears →

Loss aversion

A loss hurting more than an equal gain pleases, which makes a fair bet feel unattractive and losing positions feel worth holding. Where it appears →

Loss given default

The share of an exposure not recovered when a borrower fails — one minus the recovery rate. Seniority and security decide it. Where it appears →