APFIVE Liquidity and Rate of Return Relationship
Which of the following best explains the relationship between the liquidity of a financial asset and its rate of return?
A
Less liquid assets yield lower returns since investors prefer assets that are more readily available as cash.
B
More liquid assets always yield higher rates of return because they can be quickly converted to cash, increasing profitability.
C
More liquid assets tend to offer lower rates of return because their high liquidity reduces the risk premium investors demand.
D
Liquidity does not affect the rate of return, as both liquid and illiquid assets provide similar returns in efficient markets.
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