Groundlearn / Glossary / Illiquidity premium
Illiquidity premium
A CFA and FRM term, defined in plain English with the distinction examiners test.
What it means
The extra expected return demanded for holding an asset that cannot be sold quickly at a fair price.
The exam angle
Reported private-market volatility is understated because valuations are smoothed and infrequent, which flatters risk-adjusted measures.
Where it appears in the syllabus
- Alternative InvestmentsCFA Level I · exam weight 6–9% · Private capital, real estate, natural resources, hedge funds, digital assets.
- Liquidity & Treasury RiskFRM Part II · exam weight 15% · Funding vs market liquidity, LVaR, transfer pricing, IRRBB, LCR and NSFR.
Related terms
- Lock-up periodThe period during which an investor may not redeem from a fund.
- Return smoothingUnderstated volatility caused by infrequent or appraisal-based valuations rather than by genuinely stable prices.
- Capital callThe general partner’s demand that limited partners transfer part of their committed capital.
- Capitalisation rateNet operating income divided by property value — a property’s unlevered income yield.
- Carried interestThe general partner’s share of a private fund’s profits, typically around 20%.
- Contango and backwardationContango is a futures price above the spot price; backwardation is a futures price below it.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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