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1 Idiosyncratic Risk

An unsystematic risk. This risk can be diversified from a portfolio; hence it is also a diversifiable risk. [See also Unsystematic risk]

2 Illiquidity

Illiquidity is the opposite of liquidity; either an asset cannot be converted into cash (e.g., a leased machine cannot be sold to raise cash) or an asset cannot be sold at a reasonable price (e.g., a firm bought a machine for $1 million, but the best offer from another buyer is $100,000). In the latter case, if the firm keeps the asset and uses it, it is worth ten times more than the amount of cash it could raise in a sale in the market.

In the short run, many firms may be illiquid, that is, they may lack cash. They remedy this situation by short-term borrowing. A firm borrows cash to meet its current obligations, knowing that its cash flow will improve in the future. This kind of illiquidity is transitory and is not associated with insolvency or bankruptcy. On the other hand, if a firm faces illiquidity with no...