Which of the following is true about market risk?

Which of the following is true about market risk?

• A. It can be completely mitigated through diversification
• B. It affects only specific industries
• C. It is unpredictable and impossible to fully avoid
• D. It has minimal impact on investment portfolios

Answer: (C)

Market risk, often referred to as systematic risk, is the potential for a significant market decline that negatively affects the value of investments across the board. This type of risk is inherently linked to broader economic factors, such as interest rates, inflation, political instability, or overall market trends, making it unpredictable and challenging to manage completely. The correct answer indicates that market risk cannot be fully avoided; while investors can utilize strategies like diversification to reduce the impact of individual stock volatility, this method does not eliminate risk associated with broader market movements. Even a well-diversified portfolio can be affected by systemic issues, which can result in declines across various sectors simultaneously. Understanding this concept is crucial for investors, as it highlights the importance of risk management strategies, asset allocation, and staying informed about economic conditions.

Market risk, often referred to as systematic risk, is the potential for a significant market decline that negatively affects the value of investments across the board. This type of risk is inherently linked to broader economic factors, such as interest rates, inflation, political instability, or overall market trends, making it unpredictable and challenging to manage completely.

The correct answer indicates that market risk cannot be fully avoided; while investors can utilize strategies like diversification to reduce the impact of individual stock volatility, this method does not eliminate risk associated with broader market movements. Even a well-diversified portfolio can be affected by systemic issues, which can result in declines across various sectors simultaneously.

Understanding this concept is crucial for investors, as it highlights the importance of risk management strategies, asset allocation, and staying informed about economic conditions.