Liquidity & Marketability Risk

On the SIE, liquidity-risk items rarely use the word “liquidity”; the tell is a customer with a short time horizon or near-term cash need (down payment, tuition, emergency fund) paired with a product that locks money up. The right answer flags the mismatch, so any vehicle with a lock-up, redemption restriction, or no secondary market — hedge funds, DPPs, non-traded REITs — becomes unsuitable. Watch the rank-order trap: among bonds, thinly traded municipals are far less liquid than Treasuries, and the wide bid-ask spread is the symptom the question points to.

Do not confuse this with systematic risk — liquidity risk is issuer/security-specific (nonsystematic) and diversifiable, not a whole-market force. Contrast it with the related illiquid alternatives: a hedge-fund lock-up legally bars redemptions, whereas a thin stock is merely hard to sell. Money-market instruments sit at the opposite pole — built for liquidity, not return. Memory hook: liquid ≠ safe, illiquid ≠ unsafe — a sound investment can still trap your cash.