Question

1 tony received $500,000 after his fathers death as a death benefit from his fathers life insurance policy for which he was the named beneficiary. he wants to purchase a condo with the proceeds with the intention of renting it out for a constant flow of monthly income. which of the following risks is tony most likely to face?
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a. equity risk
b. market risk
c. inflation risk
d. liquidity risk
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Explanation:

To determine the risk Tony faces, we analyze each option:

• Equity risk: Relates to stock investments, not real estate rental (Tony is renting, not investing in equities).
• Market risk: Involves broad market fluctuations (e.g., recessions), but the focus here is on converting the condo to cash.
• Inflation risk: Relates to purchasing power erosion, not the ability to sell the condo.
• Liquidity risk: Refers to the difficulty of converting an asset (the condo) to cash quickly without significant loss. Since Tony is renting the condo, if he needs to sell it quickly, he may struggle (e.g., finding a buyer fast), so liquidity risk applies.

Answer:

c. Liquidity risk