Final answer:
The primary threats to an active short-term investment strategy are high transaction costs, market volatility, low liquidity, lack of diversification, inflation, interest rate fluctuations, economic downturns, and political instability. High transaction costs and market volatility are particularly challenging for short-term investors due to the frequent buying and selling of assets. Government and trade deficits can also impact the stability of short-term investments.
Step-by-step explanation:
The threats to an active short-term (ST) investment strategy include high transaction costs and market volatility, low liquidity and lack of diversification, inflation and interest rate fluctuations, as well as economic downturns and political instability. Each option represents a potential risk to an investment portfolio, but Option A (high transaction costs and market volatility) pertains specifically to the high costs associated with frequently buying and selling assets, as well as the uncertainties tied to changing market conditions which can be particularly challenging for short-term investors.
Furthermore, government deficits and the balance of trade can influence investment strategies. A sustained pattern of high budget deficits and trade deficits, when coupled with short-term portfolio investment, like investment in government bonds, can also create risks for an investor's portfolio. These investments can become volatile when investors are on the lookout for signs of economic decline or fears that a government might not repay what it has borrowed, prompting a rapid outflow of capital.