LO 69.8: Explain the importance of liquidity considerations for a portfolio.
Liquidity considerations are important because a portfolios liquidity profile could change significantly in the midst of a volatile market environment or an economic downturn, for instance. Therefore, measuring portfolio liquidity is a priority in stress testing.
One potential measure is liquidity duration. It is an approximation of the number of days necessary to dispose of a portfolios holdings without a significant market impact. For a given security, the liquidity duration could be calculated as follows:
(O.lOxV)
where: LD = liquidity duration for the security on the assumption that the desired maximum
daily volume of any security is 10%
Q = number of shares of the security V = daily volume of the security
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2018 Kaplan, Inc.
Topic 69 Cross Reference to GARP Assigned Reading – Litterman, Chapter 17
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