Unlock Your Market Wizardry: Conquer the 2025 Chartered Market Technician (CMT) Test!

Liquidity risk refers to the possibility that an investor may not be able to buy or sell an asset quickly enough without causing a significant impact on its price. This characteristic is particularly relevant in markets where trading volumes are low or where there are limited buyers and sellers. When liquidity is low, executing a transaction can lead to price slippage, meaning the security must be sold at a lower price (or purchased at a higher price) than expected. This risk can adversely affect an investor’s overall returns, especially in volatile or illiquid markets.

In contrast, guaranteed profit and consistent returns suggest an absence of risk, which does not align with the nature of liquidity risk. Increased market capitalization, while potentially making an asset more liquid, does not directly address the challenges associated with executing trades without suffering negative price impacts. Thus, the focus on the difficulty of buying or selling without incurring price loss appropriately captures the essence of liquidity risk.