Short definition: Market risk is the risk of losses in an investment portfolio due to changes in market prices or other factors affecting the overall market.
Explanation: It is the potential for an investment’s value to fluctuate due to broad market movements, such as changes in interest rates, economic conditions, or geopolitical events. Market risk is inherent in all investments and cannot be completely eliminated, but it can be managed through diversification and other risk management strategies.
Example: An investor holding a portfolio of stocks faces market risk if the stock market experiences a downturn, causing the value of their investments to decline.
Additional information (optional): Market risk is also known as systematic risk, as it affects the entire market or a significant portion of it. It is distinct from specific risk, which is related to individual companies or securities and can be diversified away.