How is 'market risk' defined?

Market risk is defined as the risk of losses due to changing market conditions. This encompasses various factors that can affect the financial performance of investments such as fluctuations in prices, interest rates, exchange rates, and overall economic activity. When market conditions shift, they can lead to significant changes in the valuation of assets, which can ultimately impact an investor's returns and overall portfolio performance.

Understanding market risk is crucial for investors and organizations as it helps them anticipate potential losses and implement strategies to mitigate such risks, such as diversification, hedging, and various risk management techniques. In contrast to other options, which focus on specific aspects like inflation, customer trust, or operational issues, market risk is broader and directly related to external market dynamics that influence investment values.