What is the definition of market risk?

Market risk refers to the potential for losses that can occur due to changes in the market as a whole. This encompasses a wide range of factors that could impact the performance of financial assets across a larger scale, such as economic shifts, changes in interest rates, political instability, or global events. Essentially, it is the risk stemming from broader economic phenomena that can influence all investments in the marketplace.

This type of risk contrasts with sector-specific risks, which are only relevant to certain industries or sectors. By understanding that market risk pertains to forces affecting the overall economy, one can better prepare for the inherent volatility that exists within investments that are influenced by these larger trends. Investors must manage market risk through diversification and careful analysis to mitigate its potential impact on their portfolios.