The statement that a liquid asset has higher price volatility because it trades more often is incorrect. Liquidity and price volatility are two different aspects of an asset. Liquidity refers to the ease with which an asset can be bought or sold in the market without affecting its price. On the other hand, price volatility refers to the rate at which the price of an asset increases or decreases for a set of returns. It is a common misconception that a higher trading volume (which is a characteristic of a liquid asset) leads to higher price volatility. However, this is not necessarily true. While it is possible for a liquid asset to experience price volatility, it is not a direct result of its liquidity. Instead, price volatility is influenced by factors such as market sentiment, economic indicators, and company performance. Therefore, the statement in choice C is most likely to be false.

Choice A is incorrect. This statement is actually correct. In a liquid market, it is possible to trade larger quantities of an asset without significantly affecting the price due to the high number of buyers and sellers present.

Choice B is incorrect. This statement is also correct. Liquid assets typically have smaller bid-ask spreads because there are more participants in the market, leading to tighter spreads between buying and selling prices.

Choice D is incorrect. This statement too, is correct. Liquid assets generally have higher trading volumes as they are easier to buy and sell without causing significant price changes.

Things to Remember

• Liquidity refers to the ease of buying or selling an asset without affecting its price
• Price volatility is the rate at which the price of an asset changes
• Higher trading volume does not necessarily lead to higher price volatility
• Liquid assets have smaller bid-ask spreads due to more market participants
• Trading larger quantities of a liquid asset is possible without significant price impact