Market Risk

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What is 'Market Risk'

Market risk is the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, also called "systematic risk," cannot be eliminated through diversification, though it can be hedged against. The risk that a major natural disaster will cause a decline in the market as a whole is an example of market risk. Other sources of market risk include recessions, political turmoil, changes in interest rates and terrorist attacks.

BREAKING DOWN 'Market Risk'

The two major categories of investment risk are market risk and specific risk. Specific risk, also called "unsystematic risk," is tied directly to the performance of a particular security and can be protected against through investment diversification. One example of unsystematic risk is that a company, whose stock you own will declare bankruptcy, thus making your stock worthless.

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RELATED FAQS
  1. How does market risk differ from specific risk?

    Learn about market risk, specific risk, hedging and diversification, and how the market risk of assets differs from the specific ... Read Answer >>
  2. Why should investors be concerned with risk management?

    Learn what risk management is, the difference between systematic and unsystematic risk, and why investors should be concerned ... Read Answer >>
  3. What are the primary sources of market risk?

    Learn about market risk and the four primary sources of market risk including equity, interest rate, foreign exchange and ... Read Answer >>
  4. How can a company reduce the unsystematic risk of its own security issues?

    Understand the basic concepts of systematic and unsystematic risk, and learn steps a company can take to reduce its level ... Read Answer >>
  5. Why do some investors believe that unsystematic risk is not relevant?

    Read about a stock market theory that suggests that unsystematic risks are rendered irrelevant through widespread portfolio ... Read Answer >>
  6. What are the key differences between financial risk and business risk to a company?

    Understand the difference between a company's financial risk and its business risk, along with some of the factors that affect ... Read Answer >>
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