Sample interview questions: How do you evaluate the liquidity risk of different assets?
Sample answer:
Evaluating Liquidity Risk of Assets
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Historical Trading Volume and Price Volatility: Examine the historical trading volume and price fluctuations of the asset. High trading volumes and low volatility indicate higher liquidity.
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Bid-Ask Spread: The bid-ask spread represents the difference between the highest price (ask) and the lowest price (bid) that buyers and sellers are willing to accept. A narrow bid-ask spread indicates higher liquidity.
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Market Depth: Assess the depth of the market by measuring the number and size of orders at different price levels. A deep market offers more opportunities to buy and sell at favorable prices.
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Size of the Asset Class: Larger asset classes, such as stocks and bonds, tend to have higher liquidity than niche or smaller asset classes.
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Maturity or Redemption Date: For fixed-income instruments, consider the maturity or redemption date. Instruments with shorter maturities or frequent redemption options of… Read full answer