Which of the following is true about market risk?

Market risk, also referred to as systematic risk, encompasses the potential for losses due to factors that affect the overall market. It impacts all types of investments, including stocks, bonds, and real estate. This is because market risk is driven by common economic factors such as interest rate changes, inflation, and geopolitical events that influence the entire market rather than specific securities or sectors.

The nature of market risk means that it cannot be entirely eliminated through diversification, as diversification primarily addresses unsystematic risk (the risk inherent to a specific company or industry). While it can mitigate some risks associated with individual investments, market risk will still affect a well-diversified portfolio.

In addition, market risk is distinct from credit risk. Credit risk specifically pertains to the possibility that a borrower will default on debt obligations, which is a different type of financial risk altogether. Understanding the different types of risks is key to effective investment strategy, and recognizing that market risk applies broadly helps investors prepare and respond to changes in the financial landscape.