Consulting Case Interview Practice Questions

Answer: D. Liquidity risk is financial risk due to uncertain liquidity. The risk stems from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
Uncertain liquidity can happen because:
1- a firm’s credit rating falls;
2- when the firm experiences sudden unexpected cash outflows and
3-the firm’s market itself experiences a loss in liquidity.
Key Takeaway: Liquidity problems caused many institutions to sell valuable assets at a discount in order to get cash to fund operations. For instance, endowments had to sell mutual funds that had performed well to fund university operations because many of their investments were tied up in illiquid assets such as real estate, commodities and private equity funds.