Final answer:
Liquid assets, or
short-term investments, can be quickly converted into cash, reflecting their high liquidity. Cash is a highly liquid asset, whereas assets like stocks and mutual funds, while also liquid, may carry more risk and require some time to be sold for cash.
Step-by-step explanation:
Investments that are very liquid and held for a short period of time, capable of being easily converted to a specific amount of cash, are often referred to as liquid assets or short-term investments. Liquidity is an essential concept in finance, which refers to how quickly and easily a financial asset can be used to buy a good or service. Cash, for example, is highly liquid and can be used immediately to pay for goods or services. In contrast, assets like savings accounts, while they can still be converted to cash, are not as liquid because they require a visit to the bank or an ATM, making them less accessible for immediate transactions.
Consulting the broader definitions provided by economists, cash equivalents such as stocks and mutual funds can also be considered liquid, especially when they are traded on major exchanges and can be quickly sold for cash. However, these carry higher risks, especially in the short term. Therefore, understanding the liquidity of an asset is crucial for making informed investment decisions.