NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesEasy
A client is evaluating an investment in a private equity fund that requires a multi-year capital commitment. They are concerned about their ability to access their invested capital quickly if an unforeseen need arises. Which of the following risks is the client primarily concerned about?
- AInflation risk.
- BCredit risk.
- CLiquidity risk.
- DInterest rate risk.
Show answer & explanationAnswer & explanation
Correct answer: C. Liquidity risk.
Liquidity risk refers to the risk that an investor will not be able to sell an investment quickly at a fair market price due to a lack of buyers or an inefficient market. Private equity investments are known for their illiquidity, meaning capital is tied up for extended periods.
Why the other options are wrong
- A. Inflation risk is the risk that rising prices will erode purchasing power, not directly related to the ability to sell an investment quickly.
- B. Credit risk is the risk of default by a borrower or issuer, not the ability to sell an investment quickly.
- D. Interest rate risk primarily affects fixed-income securities, not the ability to access capital in a private equity fund.
Liquidity Risk
The risk that an investment cannot be converted into cash quickly without a significant loss in value, often due to a lack of buyers in the market.
- Difficulty selling an asset quickly.
- May result in a lower selling price.
- Common in private investments (e.g., real estate, private equity).
- Opposite of marketability.
Memory trick: Remember 'L'iquidity means 'L'iquid cash, can you get it out fast?