Banking Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

The correct answer revolves around the concept of liquidity and its relationship with risk. Extremely liquid securities are asset classes that can be easily bought or sold in the market without significantly affecting their price. Since these securities can be quickly converted to cash, they typically exhibit lower risk compared to less liquid securities.

Investors often demand higher returns for taking on additional risk. Less liquid securities can be subject to larger price fluctuations, credit risks, and extended holding periods, which can increase the associated risk. As a result, investors typically shy away from less liquid options unless they are compensated with higher expected returns. Therefore, the secure nature of highly liquid securities contributes to their classification as lower risk assets, making this answer the most accurate.

In contrast, the consideration of maturity and rates of return in the other choices does not directly establish a consistent relationship with liquidity. Securities that are liquid do not necessarily have a longer maturity compared to their illiquid counterparts, as liquidity is more about the ease of trading than the duration of the investment. Consequently, options focusing on returns or maturity do not accurately reflect the inherent characteristics of liquidity.