with a horizon that exceeds hrL will prefer class L stocks to T-bills. Those with horizons below hrL will choose bills. For even longer horizons, because cI ex- ceeds cL, the net rate of return on relatively illiquid class I stocks will exceed that on class L stocks. Therefore, investors with horizons greater than hLI will specialize in the most illiquid stocks with the highest gross rate of return. These investors are harmed least by the effect of trading costs. Now we can determine equilibrium illiquidity premiums. For the marginal investor with horizon hLI, the net return from class I and L stocks is the same. Therefore, r cL(x 1/hLI) r cI(y 1/hLI)   We can use this equation to solve for the relationship between x and y as follows:   y x1 hLI   cL ax I   1 b hLI The expected gross return on illiquid stocks is then   r r c y r cI I I h   1 cL ax h   1 b r cLx h   acI cLb   (9.10) LI LI LI Recalling that the expected gross return on class L stocks is rL r cLx, we conclude that the illiquidity premium of class I versus class L stocks is   1 rI rL LI (cI cL) (9.11) Similarly, we can derive the liquidity premium of class L stocks over T-bills. Here, the marginal investor who is indifferent between bills and class L stocks