Sample interview questions: How do you assess the liquidity of different assets and its impact on portfolio management?
Sample answer:
Assessing Liquidity of Assets
- Cash and Cash Equivalents: Highly liquid, with immediate access to funds.
- Marketable Securities: Stocks, bonds, and mutual funds that can be easily bought and sold, providing moderate to high liquidity.
- Non-Marketable Securities: Private investments, real estate, and physical assets with limited or no trading market, making them less liquid.
- Illiquid Assets: Assets with no active market and significant barriers to converting into cash, e.g., real estate held for long-term appreciation.
Impact on Portfolio Management
- Liquidity Constraints: Limited liquidity can restrict portfolio adjustments, reduce risk mitigation options, and limit availability of funds to meet unexpected liabilities.
- Investment Returns: High-liquidity assets generally offer lower returns, while illiquid assets may provide higher returns due to the illiquidity premium.
- Time Horizon: Short-term portfolios require higher liquidity to meet cash flow needs, while long-term portfolios can tolerate more illiquid assets to maximize returns.<... Read full answer