Which term describes the risk that a security will be difficult to sell quickly without incurring a loss?

Which term describes the risk that a security will be difficult to sell quickly without incurring a loss?

• A. Liquidity Risk
• B. Opportunity Cost
• C. PEST Analysis
• D. Common Stock

Answer: (A)

Liquidity risk is the risk that a security cannot be sold quickly without taking a lower price. If there aren’t many buyers or the market is thin, selling fast may require accepting a discount from fair value because the bid side is weak or the bid-ask spread is wide. This concept matters because assets with low trading volume or few market participants are harder to exit promptly at a fair price, which is exactly what this risk captures. The other terms don’t describe this situation: opportunity cost is what you miss out on by choosing one option over another; PEST analysis is a framework for evaluating political, economic, social, and technological factors; common stock is a type of equity, not a specific risk descriptor.

Liquidity risk is the risk that a security cannot be sold quickly without taking a lower price. If there aren’t many buyers or the market is thin, selling fast may require accepting a discount from fair value because the bid side is weak or the bid-ask spread is wide. This concept matters because assets with low trading volume or few market participants are harder to exit promptly at a fair price, which is exactly what this risk captures.

The other terms don’t describe this situation: opportunity cost is what you miss out on by choosing one option over another; PEST analysis is a framework for evaluating political, economic, social, and technological factors; common stock is a type of equity, not a specific risk descriptor.