Why should you consider liquidity in making investment decisions? Wha

QUESTION

Why should you consider liquidity in making investment decisions?

What will be an ideal response?

ANSWER

The more liquid an investment is, the lower the return that the investment will earn. A savings account has a lower interest rate than a certificate of deposit. You must also estimate the amount of cash that you will need in any time period. If you have too little money invested in liquid assets, you may have to convert other assets into cash. This can be time-consuming, expensive, and inefficient.