FRM Part II · FRM Exam Part II · Illiquid Assets
Which feature is most characteristic of the liquidity premium that investors may earn on illiquid assets?
The illiquidity premium compensates investors for bearing trading costs, long holding periods and the risk of being unable to exit in stress. It is not guaranteed, depends on the investor's own liquidity needs, and adds to rather than reduces funding liquidity risk.
- ACompensation for bearing trading costs, long holding periods and inability to exit in stressCorrect
- BA guaranteed excess return over liquid assets with no added risk
- CA return that is independent of the investor's own liquidity needs
- DA reduction in funding liquidity risk for the investor
Explanation
The illiquidity premium compensates for transaction costs, delayed exit and the risk of being unable to sell in stress. It is not guaranteed, depends on investor liquidity needs, and increases rather than reduces funding liquidity risk.
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