NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client is evaluating an investment in a private equity fund. They are concerned about the ability to convert their investment into cash quickly if needed. Which type of risk is the client primarily concerned with?
- ALiquidity risk
- BSystematic risk
- CCredit risk
- DInterest rate risk
Show answer & explanationAnswer & explanation
Correct answer: A. Liquidity risk
Liquidity risk refers to the difficulty of converting an asset into cash quickly and without substantial loss in value. Private equity investments are known for their illiquidity, meaning they can be challenging to sell on short notice.
Why the other options are wrong
- B. Systematic risk (market risk) is the risk of the overall market, not specific to converting an asset to cash.
- C. Credit risk is the risk of default by a borrower or issuer, not related to the ease of selling an asset.
- D. Interest rate risk affects bond prices due to changes in interest rates, not the ease of converting an asset to cash.
Liquidity Risk
The risk that an investment cannot be bought or sold quickly enough in the market to prevent or minimize a loss.
- Common in assets like private equity, real estate, and some alternative investments.
- Can lead to significant price concessions if a quick sale is needed.
- Opposite of a liquid asset, which can be easily bought/sold.
Memory trick: Risks: What could go wrong with my money?