What does the term "market risk" refer to?

The term "market risk" specifically refers to the potential for losses resulting from fluctuations in market prices or interest rates. This encompasses a wide range of financial assets and reflects the vulnerability of investments and portfolios to adverse movements in the market. For example, when interest rates rise, the value of fixed income securities typically declines, leading to potential losses for investors. Similarly, changes in stock prices can impact the value of equity investments, creating exposure to the overall market environment.

This concept is fundamental in finance because it highlights the inherent uncertainties that can affect asset prices due to macroeconomic factors, geopolitical events, or shifts in supply and demand. Understanding market risk is crucial for investors and financial managers as it aids in risk assessment, portfolio management, and the implementation of hedging strategies to mitigate potential losses.