Term · Portfolio & Execution
Liquidity budget
In briefA liquidity budget sets out what share of the portfolio may flow into hard-to-trade stocks. For small caps it prevents several attractive but illiquid names from blocking the portfolio together.
Definition
A predefined framework for how much of the portfolio may be invested in stocks with low tradability.
How it is calculated
Formula. Example: sum of illiquid positions ≤ x% of the portfolio; a single position ≤ y days to exit.
Why it matters for small caps
In the small-cap segment a liquidity budget prevents several attractive but hard-to-trade stocks from cumulatively blocking the portfolio.
Common misreadings
- It is often checked by individual stock; what matters is the aggregation across the whole portfolio.
In the process
Frequently asked
What is a liquidity budget?
It is a rule for the maximum share of illiquid positions in the portfolio. This deliberately limits tradability risk.
How is a liquidity budget implemented?
You cap, for example, the sum of illiquid positions at a percentage and limit the time to exit per name. What matters is considering the whole portfolio.
Which mistake often happens with a liquidity budget?
It is checked only per individual name rather than in aggregate. Only the aggregation shows whether the portfolio as a whole remains tradable.
Related terms
Sources
Primary
CFA Institute – Active Equity Investing: Portfolio Construction
https://www.cfainstitute.org/insights/professional-learning/refresher-readings/2026/active-equity-investing-portfolio-construction
https://www.cfainstitute.org/insights/professional-learning/refresher-readings/2026/active-equity-investing-portfolio-construction
Methodology
CFA Institute – Trade Strategy and Execution
https://www.cfainstitute.org/insights/professional-learning/refresher-readings/2026/trade-strategy-execution
https://www.cfainstitute.org/insights/professional-learning/refresher-readings/2026/trade-strategy-execution
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.