Which asset class is most likely to contribute to liquidity risk in a portfolio due to its long time to sale?

Which asset class is most likely to contribute to liquidity risk in a portfolio due to its long time to sale?

• A. Cash equivalents
• B. Government bonds
• C. Real estate
• D. Corporate stocks

Answer: (C)

Liquidity risk is the risk that you can’t convert assets to cash quickly enough or without taking a big price hit when you need funds. Real estate stands out because it’s fundamentally illiquid: selling a property typically involves listing, showings, negotiations, inspections, financing, and closing, which can take weeks or months. Costs are high (brokerage, closing, taxes), and prices aren’t as transparent or readily comparable as for other assets, so buyers and sellers meet less frequently and at wider bid-ask spreads. In contrast, cash equivalents are designed to be instantly available, government bonds have highly active markets with quick pricing, and many corporate stocks trade on exchanges with broad liquidity—though some illiquid issues exist, they’re usually less restrictive than real estate. Because of the long time frame and higher costs to sale, real estate most readily contributes to liquidity risk in a portfolio.

Liquidity risk is the risk that you can’t convert assets to cash quickly enough or without taking a big price hit when you need funds. Real estate stands out because it’s fundamentally illiquid: selling a property typically involves listing, showings, negotiations, inspections, financing, and closing, which can take weeks or months. Costs are high (brokerage, closing, taxes), and prices aren’t as transparent or readily comparable as for other assets, so buyers and sellers meet less frequently and at wider bid-ask spreads. In contrast, cash equivalents are designed to be instantly available, government bonds have highly active markets with quick pricing, and many corporate stocks trade on exchanges with broad liquidity—though some illiquid issues exist, they’re usually less restrictive than real estate. Because of the long time frame and higher costs to sale, real estate most readily contributes to liquidity risk in a portfolio.