What creates higher liquidity preferences for investors in a 3-year investment?

Higher liquidity preferences for investors in a 3-year investment are influenced by the need for earlier access to funds. In an investment context, liquidity refers to the ease with which an asset can be converted into cash without significantly affecting its price. When investors have the option to access their funds earlier, they are more likely to demand liquidity, as it provides them with flexibility to meet financial needs or take advantage of emerging opportunities.

The correct answer highlights that having earlier access to funds reduces the perceived risk of being tied up in a long-term investment, which becomes particularly relevant over a medium-term horizon like three years. Investors typically prefer liquidity because it allows them to respond quickly to changes in market conditions or personal circumstances.

While factors like longer holding periods, slower reinvestment opportunities, and higher returns can influence investment decisions, they do not inherently create a preference for liquidity in the same way that early access to funds does. Longer holding periods can actually lead to reduced liquidity preferences as investors commit their capital for extended times, while slower reinvestment opportunities do not directly impact liquidity but rather the overall attractiveness of an investment. High returns may attract investors, but they do not necessarily equate to higher liquidity preferences.