What is the liquidity-risk premium associated with?

The liquidity-risk premium is specifically associated with the additional return that investors require for accepting the risk of investing in illiquid securities. Illiquid securities are those that cannot be easily bought or sold in the market without causing a significant change in their price. Because these securities are harder to trade, investors demand a higher return as compensation for taking on this liquidity risk. This additional return serves as an incentive for investors to hold onto less liquid investments, as they are exposing themselves to potential difficulties in selling the security quickly or at a fair market price.

In contrast, other options relate to different types of risks. Advertised investment returns are tied to marketing and may not reflect actual risks. Price fluctuations are more relevant to general market risk or volatility rather than specifically to liquidity. The risk of inflation affecting bonds concerns the purchasing power of future cash flows rather than the liquidity of the investment itself. Thus, the correct focus on the liquidity-risk premium being about the additional return for illiquid securities reflects its nature as a form of compensation for bearing a specific type of risk.