What does "market risk" refer to?

Market risk refers to the potential for an investor to experience losses due to fluctuations in the prices of securities or financial instruments in the market. This concept encompasses the overall movements in the market, which can be influenced by a variety of factors such as economic data, political events, or changes in interest rates. Therefore, the correct answer identifies the essence of market risk as the risk of losses arising from changes in financial market prices, impacting all investors and their portfolios regardless of the specific assets they hold.

In practice, market risk is a broad category that captures systematic risks affecting everyone in the market, not just those associated with specific securities or economic conditions. Other options present narrower forms of risk or misinterpret the nature of market risk. For instance, risks tied to specific stocks would refer to a different type of risk known as unsystematic risk, while risks of economic downturns or theft and fraud are not inherent to market pricing movements. Understanding market risk is crucial for investors as it helps in devising strategies to mitigate potential losses through diversification or hedging techniques.