Studies of liquidity spreads in security markets have shown that
A) liquid stocks earn higher returns than illiquid stocks.
B) illiquid stocks earn higher returns than liquid stocks.
C) both liquid and illiquid stocks earn the same returns.
D) illiquid stocks are good investments for frequent,short-term traders.
E) None of these are true.

Question

Quizplus · Accepted Answer

Studies have shown that illiquid stocks tend to earn higher returns than liquid stocks, as investors demand a higher return for the added risk of investing in an illiquid asset. However, this also means that illiquid stocks can be more volatile and risky, and may not be suitable for all investors.

Studies of Liquidity Spreads in Security Markets Have Shown That