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Market Risk

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Key Highlights

  • Market risk is the chance that your investments could lose value due to reason that something big affects the financial market.

  • This includes adverse price movements in equities, commodities, interest rates, and currencies, as well as broader economic events such as recessions, political instability, or natural disasters.

What is Market Risk?

Market risk is the chance that your investments could lose value due to reason that something big affects the financial market. It’s not just about one company struggling- it’s about the whole market reacting to things like economic shifts, global events, or political changes. This includes adverse price movements in equities, commodities, interest rates, and currencies, as well as broader economic events such as recessions, political instability, or natural disasters.

Key Points

  • Systematic: Market risk affects the entire market simultaneously and cannot be eliminated through diversification, though it can be managed or hedged in other ways.

  • Sources: Changes in interest rates, stock prices, currency values, or commodity prices (like oil or gold). Big events like recessions or global crises also contribute.

  • How It’s Measured: Using tools like Value-at-Risk (VaR), beta (how much an investment swings with the market), or tracking price volatility.

Types of Market Risk

  • Equity Risk: Equity risk is the chance that the value of your stocks might drop. Since stock prices can rise and fall for all sorts of reasons, there’s always a risk your investment won’t be worth as much tomorrow as it is today.

  • Interest Rate Risk: Losses from changing interest rates (e.g., higher rates can reduce bond values).

  • Currency Risk: Losses when exchange rates shift, like if the dollar loses value compared to other currencies.

  • Commodity Risk: Losses from price changes in things like oil, gold, or crops.

Examples

  • A sudden rise in interest rates might make your bonds worth less.

  • Political unrest in a major country could cause a global stock market dip, hurting your portfolio.