Which two characteristics primarily determine an asset's liquidity?

The two characteristics that primarily determine an asset's liquidity are transaction costs and price volatility. Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price.

Transaction costs play a critical role in liquidity. When the costs associated with buying or selling an asset are low, investors can execute trades more easily and frequently, thus enhancing the asset's liquidity. High transaction costs can deter investors from trading, leading to lower liquidity as it becomes more expensive to move in and out of positions.

Price volatility also affects liquidity. Assets that have high price volatility might experience larger price swings, making investors cautious and less willing to buy or sell, which can reduce liquidity. Conversely, assets with stable prices tend to attract more buyers and sellers, thereby increasing liquidity.

While the other options contain factors that can influence market behavior, they do not directly address the fundamental aspects of liquidity as transaction costs and price volatility do. Factors like investor sentiment, market demand, regulatory environment, and investor knowledge can influence trading but are not primary determinants of how quickly an asset can be liquidated into cash without affecting its price significantly.