How is liquidity best defined in finance?

Liquidity in finance is best defined as the ease with which an asset can be converted into cash without significantly affecting its market price. This concept is crucial for individuals and businesses alike, as it impacts their ability to meet short-term obligations and manage cash flow. Assets that are highly liquid, such as cash itself, savings accounts, and certain stocks, can be quickly accessed and used to cover expenses.

In contrast, other options presented do not accurately capture the essence of liquidity. For instance, the total value of assets owned assesses overall wealth but does not indicate how quickly those assets could be turned into cash. Similarly, debt sustainability relates to how much debt a person can handle based on their income and expenses, which is a different aspect of personal finance. The rate of return on an investment focuses on profitability rather than the ease of converting an asset into cash. Thus, liquidity is specifically about the quickness and ease of access to cash when needed, making the correct choice the one that focuses precisely on this characteristic.