What type of risk is referred to as 'market risk'?

What type of risk is referred to as 'market risk'?

• A. The risk of losing investments due to market price fluctuations
• B. The risk of default on loans
• C. The risk associated with currency exchange rates
• D. The risk of interest rate changes

Answer: (A)

Market risk refers specifically to the risk of losing investments due to fluctuations in market prices. This encompasses a wide range of factors, including changes in stock prices, commodity prices, and overall economic conditions that might impact the financial markets. When investors hold assets, the value of those assets can rise or fall due to market sentiment and various external variables, which is a fundamental characteristic of market risk. The other types of risk mentioned—such as the risk of default on loans, currency exchange rate risk, and interest rate risk—relate to more specific financial elements rather than the broader context of market price fluctuations. Default risk involves the possibility that a borrower will fail to meet the repayment obligations, while currency exchange rate risk pertains to the potential decrease in value of investments due to changes in currency values. Interest rate risk affects the value of fixed-income securities when interest rates change but does not encompass the broader scope of market price movements in the way that market risk does. Thus, the definition that aligns with market risk is the risk of losing investments due to market price fluctuations.

Market risk refers specifically to the risk of losing investments due to fluctuations in market prices. This encompasses a wide range of factors, including changes in stock prices, commodity prices, and overall economic conditions that might impact the financial markets. When investors hold assets, the value of those assets can rise or fall due to market sentiment and various external variables, which is a fundamental characteristic of market risk.

The other types of risk mentioned—such as the risk of default on loans, currency exchange rate risk, and interest rate risk—relate to more specific financial elements rather than the broader context of market price fluctuations. Default risk involves the possibility that a borrower will fail to meet the repayment obligations, while currency exchange rate risk pertains to the potential decrease in value of investments due to changes in currency values. Interest rate risk affects the value of fixed-income securities when interest rates change but does not encompass the broader scope of market price movements in the way that market risk does. Thus, the definition that aligns with market risk is the risk of losing investments due to market price fluctuations.