For the CAPM that examines illiquidity premiums, if there is correlation among assets due to common systematic risk factors, the illiquidity premium on asset i is a function of
A) the market's volatility.
B) asset i's volatility.
C) the trading costs of security i.
D) the risk-free rate.
E) the money supply.

Question

Quizplus · Accepted Answer

The illiquidity premium on an asset is primarily influenced by the trading costs associated with that security. This includes factors such as bid-ask spreads, commissions, and any other costs incurred during the trading process. These costs directly impact an investor's ability to quickly buy or sell the asset without affecting its price, thus contributing to the asset's illiquidity premium.

For the CAPM That Examines Illiquidity Premiums, If There Is