What is meant by "market risk"?

Market risk refers to the potential for an investment's value to decrease due to adverse changes in the overall market conditions. This encompasses a variety of factors that can lead to unfavorable price movements, such as economic downturns, changes in interest rates, and shifts in investor sentiment. When discussing market risk, it is essential to recognize that it affects all investments within a market and is not limited to any specific sector or company.

The concept of market risk highlights the inherent volatility present in financial markets, where external influences can lead to price fluctuations across a wide spectrum of assets. Investors must consider this risk when constructing their portfolios, as market-wide events can have significant impacts regardless of an individual investment's underlying fundamentals.

In contrast, the other choices focus on different kinds of risks. Risk associated with specific sectors pertains to sector-specific influences, rather than the overall market, while bankruptcy risk refers to the financial viability of a single company. Geopolitical events introduce unique external risks, but market risk encompasses a broader range of factors affecting the entire market landscape. Understanding market risk is crucial for effective investment strategy and risk management.