Which asset class is most associated with high liquidity risk due to difficulty in quick sale?

Which asset class is most associated with high liquidity risk due to difficulty in quick sale?

• A. Office buildings
• B. Stocks of blue-chip companies
• C. Short-term government bonds
• D. Cash equivalents

Answer: (A)

Liquidity risk is the risk that an asset can’t be sold quickly without taking a discount to its value. Office buildings, as real estate, are much more illiquid than financial assets. They require finding a willing buyer, negotiating terms, arranging due diligence, and coordinating financing, all of which can take weeks or months and may force price concessions to close a sale promptly. In contrast, blue-chip stocks trade on active markets with many buyers and sellers, so they can be sold quickly with minimal price impact. Short-term government bonds also have highly liquid markets and can be sold rapidly with little discount. Cash equivalents are essentially cash or near-cash assets that can be converted to cash instantly. Because of these characteristics, office buildings are the asset class most associated with high liquidity risk due to difficulty in quick sale.

Liquidity risk is the risk that an asset can’t be sold quickly without taking a discount to its value. Office buildings, as real estate, are much more illiquid than financial assets. They require finding a willing buyer, negotiating terms, arranging due diligence, and coordinating financing, all of which can take weeks or months and may force price concessions to close a sale promptly. In contrast, blue-chip stocks trade on active markets with many buyers and sellers, so they can be sold quickly with minimal price impact. Short-term government bonds also have highly liquid markets and can be sold rapidly with little discount. Cash equivalents are essentially cash or near-cash assets that can be converted to cash instantly. Because of these characteristics, office buildings are the asset class most associated with high liquidity risk due to difficulty in quick sale.