What is a common risk associated with alternative investments?

The identification of poor liquidity and market volatility as a common risk associated with alternative investments accurately reflects the characteristics of this asset class. Unlike traditional investments such as stocks and bonds, alternative investments often involve assets that are not traded on standard exchanges, which can lead to challenges in buying or selling them quickly without impacting their market price. This inherent illiquidity can pose a significant risk for investors, especially in times of market stress when the need for quick access to cash may be greater.

Moreover, alternative investments can also be subject to higher levels of market volatility because many are linked to niche markets or specific sectors. Events in these areas can lead to pronounced price swings, thus increasing the risk of potential losses. This combination of higher volatility and liquidity constraints creates a unique set of challenges for investors in this space, making it crucial for them to understand and manage these risks effectively.

The other options do not accurately capture the typical risk landscape for alternative investments. Lower volatility compared to stocks does not apply since these investments can often be more volatile. Higher regulatory oversight is generally associated with traditional investments rather than alternatives, which may face less regulation. Lastly, the notion of guaranteed returns is misleading; alternative investments do not assure returns irrespective of market conditions, aligning them more closely with risk