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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Evaluating the Financial Position of Clients

In personal financial planning, which ratio is computed as liquid assets divided by monthly non-discretionary cash expenses, and is commonly used to judge whether a client holds an adequate emergency reserve?

The liquidity ratio, also called emergency fund coverage, is liquid assets divided by monthly non-discretionary expenses. It tells how many months of essential spending the client can fund from liquid holdings, so it is used to judge emergency reserve adequacy.

  1. ALiquidity ratio (emergency fund coverage in months)Correct
  2. BSavings ratio
  3. CDebt service ratio
  4. DSolvency ratio

Explanation

The liquidity ratio divides liquid assets by monthly non-discretionary expenses and shows how many months of essential outgo the client can meet without selling long-term assets. The savings ratio uses savings over income, the debt service ratio uses EMIs over income, and the solvency ratio uses net worth over total assets.

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