FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client holds an investment in a non-traded Real Estate Investment Trust (REIT) and wishes to liquidate their position. Which of the following risks is MOST relevant to this situation?
- AInterest Rate Risk
- BReinvestment Risk
- CInflation Risk
- DLiquidity Risk
Show answer & explanationAnswer & explanation
Correct answer: D. Liquidity Risk
Non-traded REITs are not listed on public exchanges, making them inherently illiquid. Investors may have difficulty selling their shares quickly or at a fair price, especially if the REIT does not have a redemption program or if market conditions are unfavorable.
Why the other options are wrong
- A. Interest rate risk primarily affects bond prices and fixed-income investments, not directly the ability to sell a non-traded REIT.
- B. Reinvestment risk is the risk that income from an investment cannot be reinvested at the same rate, typically applicable to bonds.
- C. Inflation risk is the risk that rising prices erode purchasing power, affecting all investments but not directly related to the ability to sell a non-traded REIT.
Non-Traded REIT Liquidity Risk
The risk associated with the difficulty of selling shares of a non-traded Real Estate Investment Trust (REIT) quickly or at a fair price due to the absence of an active secondary market.
- Non-traded REITs are not listed on stock exchanges.
- Investors may have limited or no redemption options.
- Can result in an inability to access capital when needed.
Memory trick: Non-traded REITs: Think illiquid, like concrete shoes.