What does liquidity risk refer to?

Liquidity risk refers specifically to the potential challenge an individual or organization faces when attempting to convert their assets into cash quickly without significantly impacting their market price. In financial contexts, this implies that if an asset cannot be sold rapidly at a reasonable price, it creates a liquidity risk. Essentially, it deals with the ease or difficulty with which assets can be made liquid, or available in cash form, to meet obligations or capitalize on opportunities.

Understanding liquidity risk is crucial for managing personal finances and investment portfolios because it affects one's ability to manage short-term needs without having to incur losses or sell other investments at an inopportune time. The other options focus on different aspects of financial risk or investment, but they do not align with the definition of liquidity risk.