The definition of 'Market risk'
Market risk is the risk that the value of an investment will decrease due to changes in market factors. These factors will have an impact on the overall performance on the financial markets and can only be reduced by diversification into assets that are not correlated with the market – such as certain alternative asset classes.
Market risk is sometimes called “systematic risk” because it relates to factors, such as a recession, that impact the entire market.
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There are several different risk factors that make up market risk.
- Currency risk: The risk that exchange rates will go up or possibly down
- Equity risk: The risk that share prices will go up or down
- Inflation risk: the potential for inflation to increase the price of all goods and services such that it undermines the value of money
- Commodity risk: the possibility of commodity prices such as metals change value dramatically
- Interest rate risk: the risk that comes from an increase or decrease in interest rates