How are risk and return related to liquidity? (2024)

How are risk and return related to liquidity?

If you want low risk and high return, you're going to have to give up liquidity. You're probably going to be putting your money into something like real estate. If you want high liquidity and high return, you're going to have to take on some significant risk.

What is the relationship between liquidity and risk?

Liquidity risk relates to short-term cash flow issues, while solvency risk means the company is insolvent on its overall balance sheet, especially related to long-term debts. Liquidity problems can potentially lead to insolvency if not addressed, but the two have distinct meanings.

What is the relationship between liquidity and returns?

Thus, investors are expected to demand higher returns for less liquid stocks. In addition to this, stocks with returns that are sensitive to changes in liquidity should yield higher returns to compensate the investors for this additional risk.

What is the relationship between risk and potential return or liquidity and return?

A positive correlation exists between risk and return: the greater the risk, the higher the potential for profit or loss. Using the risk-reward tradeoff principle, low levels of uncertainty (risk) are associated with low returns and high levels of uncertainty with high returns.

What is the difference between risk and return and liquidity?

Inflation risk—The rate of return on an investment that is less than the rate of inflation. Liquidity risk—The inability to quickly sell an asset at an acceptable price. Return—The profit or loss from an investment.

How risk and return are related?

The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide.

What is relationship between liquidity and profitability and risk and return?

Take, for example, the (potential) trade-off between liquidity and profitability. In the stock market setting, more liquid shares would represent lower investment exit risk for the investor. Therefore, they should be recognized as more attractive assets, enjoying a higher price and lower market risk/expected return.

Why is liquidity risk a risk?

Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost. Liquidity exposure represents the potential stressed outflows in any future period less expected inflows.

What is the role of liquidity risk?

Liquidity risk professionals monitor cash flows, analyse funding sources, and develop strategies to maintain sufficient liquidity. They assess potential liquidity stress scenarios, implement liquidity risk management frameworks, and establish contingency plans to mitigate liquidity risks.

How is liquidity related to return quizlet?

"return and liquidity" - Liquidity: is the ease with which people can convert an asset into cash. Return: is the money an investor receives above and beyond the sum of money initially invested.

What is liquidity related to?

Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Cash is the most liquid of assets, while tangible items are less liquid. The two main types of liquidity are market liquidity and accounting liquidity.

What is liquidity in simple words?

Definition: Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it. Description: Liquidity might be your emergency savings account or the cash lying with you that you can access in case of any unforeseen happening or any financial setback.

What is the relationship between risk and return quizlet?

there is a positive relationship between risk and return. the more risk an investor is willing to accept, the higher the expected return must be.

What is difference between risk and return?

A risk is the chance or odds that an investor is going to lose money, and a return is a gain made by an investor.

What is the relationship between risk and return brainly?

Explanation: The relationship between risk and return is an important concept in finance. Generally, higher risk is associated with the potential for higher returns, while lower risk is associated with lower potential returns. This relationship is known as the risk-return trade-off.

Which investment has highest risk?

What are the two causes of liquidity risk?

Two main causes for corporate liquidity risk may be identified: The absence of a sufficient “safety buffer” to cover overall expenses (the most unexpected ones in particular); Difficulty finding necessary funding on the credit market or on financial markets.

What is liquidity risk examples?

An example of liquidity risk would be when a company has assets in excess of its debts but cannot easily convert those assets to cash and cannot pay its debts because it does not have sufficient current assets. Another example would be when an asset is illiquid and must be sold at a price below the market price.

What is risk and how is risk and return related?

The term return refers to income from a security after a defined period either in the form of interest, dividend, or market appreciation in security value. On the other hand, risk refers to uncertainty over the future to get this return. In simple words, it is a probability of getting return on security.

Are risk and return negatively related?

According to standard finance, risk and return are positively correlated, but many studies conducted in the behavioral finance and prospect theory context have revealed that risk and return are not positively correlated, but are negatively correlated.

Which statement is true of the relationship between risk and return?

Which statement is true of the relationship between risk and return? The greater the risk, the greater the potential return.

What is the relationship of liquidity and profitability?

As liquidity and profitability are inversely related to each other, hence increasing profitability would tend to reduce firms' liquidity and too much attention on liquidity would tend to affect the profitability.

What are the major current assets?

Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

Is liquidity related to profitability?

Having adequate or high liquidity does not mean a business is profitable – it simply means there are enough assets to sufficiently cover immediate and short-term expenses. And even if your business is profitable, that does not necessarily mean you are adequately managing your current financial obligations.

Who is most affected by liquidity risk?

BANKS AND LIQUIDITY RISK

The fundamental role of banks typically involves the transfor- mation of liquid deposit liabilities into illiquid assets such as loans; this makes banks inherently vulnerable to liquidity risk.