The ease with which an asset can be bought or sold without materially affecting its price — cash is perfectly liquid; private real estate is highly illiquid.
Deeper Explanation
Liquidity is not binary — it exists on a spectrum, and it is not stable. Assets that appear liquid in normal markets can become illiquid in a crisis when every participant wants to sell simultaneously. Marks calls this "liquidity illusion": investors price assets assuming they can exit at will, but liquidity disappears exactly when it is most needed. A portfolio's true liquidity is determined by its worst-case scenario, not its normal-market scenario. Investors who ignore liquidity premium — the extra return demanded for holding illiquid assets — systematically misprice risk.
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