Chartered Alternative Investment Analyst (CAIA) Practice Exam 2025 – All-in-One Guide to Master Your Certification!

Liquidity risk refers specifically to the challenges investors face when looking to buy or sell an investment in a timely manner without significantly impacting the asset's price. In the context of alternative investments, which often include less liquid assets like private equity, hedge funds, or real estate, this risk is particularly pertinent. Investors may find that even if they wish to liquidate their positions, the market for such assets may not provide the necessary buyers at the desired price level, leading to potential delays or losses.

In this framework, liquidity risk highlights the intrinsic nature of alternative investments, where selling opportunities could be limited and thus increase both the time and financial costs associated with the liquidation of assets. This makes option B the most accurate description of liquidity risk. Understanding this concept is crucial for investors in alternative investments, as it affects their financial strategy and liquidity management over time.