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 the above are true.

Question

Quizplus · Accepted Answer

Studies have shown that illiquid stocks tend to have higher returns than liquid stocks. This is because investors demand a higher return for holding an illiquid asset, which compensates them for the risk of not being able to sell the asset quickly and easily if they need to. The liquidity premium, which is the difference between the return on a liquid asset and an equivalent illiquid asset, is therefore positive.

Studies of Liquidity Spreads in Security Markets Have Shown That