A portfolio that cannot be sold quickly and consists primarily of commercial real estate is highly exposed to which risk?

A portfolio that cannot be sold quickly and consists primarily of commercial real estate is highly exposed to which risk?

• A. Market risk
• B. Liquidity risk
• C. Credit risk
• D. Operational risk

Answer: (B)

Liquidity risk is the key idea here. It measures how easily assets can be turned into cash without taking a big loss. A portfolio made mostly of commercial real estate and that can’t be sold quickly is especially vulnerable because real estate typically requires a longer sale process, fewer ready buyers, and potential price concessions to close fast. In stressed markets, the need to cash out promptly can force sales at values well below what the properties are worth, illustrating liquidity risk in a tangible way. While market risk relates to broad movements in asset prices, and credit risk concerns defaults by borrowers or counterparties, and operational risk comes from failures in internal processes or systems, none of these focus specifically on the ability to convert assets into cash quickly. The situation described points most directly to liquidity risk because the urgency and difficulty of selling illiquid assets like commercial real estate drive cash-flow and funding concerns.

Liquidity risk is the key idea here. It measures how easily assets can be turned into cash without taking a big loss. A portfolio made mostly of commercial real estate and that can’t be sold quickly is especially vulnerable because real estate typically requires a longer sale process, fewer ready buyers, and potential price concessions to close fast. In stressed markets, the need to cash out promptly can force sales at values well below what the properties are worth, illustrating liquidity risk in a tangible way.

While market risk relates to broad movements in asset prices, and credit risk concerns defaults by borrowers or counterparties, and operational risk comes from failures in internal processes or systems, none of these focus specifically on the ability to convert assets into cash quickly. The situation described points most directly to liquidity risk because the urgency and difficulty of selling illiquid assets like commercial real estate drive cash-flow and funding concerns.