FIN 411 Quiz # 8: May 22, 1996
1. (10 points)
Amihud and Mendelson argue that liquidity is an important determinant
of the demand for assets.
- Explain why security prices would be higher and expected rates
of return lower if the cost of illiquidity could be reduced for
an asset.
- Briefly summarize the evidence Amihud and Mendelson produce
to support this hypothesis?
- What implications, if any, does the Amihud and Mendelson analysis
have for portfolio theory (i.e., the way that different investors
choose optimal portfolios of assets?) [Hint: can you think
of specific types of investors or investment accounts that would
be more or less suitable for illiquid assets?]
- How does it affect corporate finance (e.g., the types of securities
that firms choose to sell to finance their activities? [Hint:
what can a firm do to make its securities more liquid?]
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