Liquidity
How easily and quickly a security can be converted to cash without significant price impact.
On the exam, the classic item gives two otherwise-identical securities and asks which has the lower required return — it hinges on the liquidity premium: the less-liquid one demands higher expected return, so its price is lower, all else equal. The other staple is “rank by liquidity” or “which transaction cost is largest.” Beyond the quoted spread, large orders in thinly traded names also pay market impact (the price moves against you as you fill), so they cost more in both dimensions. Watch the direction trap: more liquid means a smaller premium, not a larger one.
Don’t confuse liquidity with its drivers or its cousins. Float is a cause — more freely tradable shares feed liquidity — not the measure itself. Volatility is the dispersion of returns, not tradability: a stock can be highly liquid yet volatile (a heavily traded large-cap around earnings). Memory hook: float and volume are inputs; spread is the readout. Liquidity also tends to evaporate exactly when markets fall, which is why illiquidity risk earns a premium.
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