How is market risk defined?

Market risk is defined as the risk of losses due to changes in market prices. This encompasses the overall fluctuations in market value applicable to a broad range of assets, impacting portfolios irrespective of a particular stock's performance. Market risk is often attributed to factors such as economic changes, political events, or broader market trends which can cause shifts in various securities.

The essence of market risk lies in its ability to affect entire markets rather than specific assets, making it a fundamental concept in finance. For instance, if there is a downturn in the economy, many stocks will likely lose value concurrently, thereby illustrating broader market susceptibility.

Understanding this type of risk is crucial for investors as they consider their investment strategies; it emphasizes the importance of diversification to mitigate exposure across different sectors or asset classes, rather than focusing solely on individual stock volatility or risk associated solely with interest rates.