Glossary entry
Market risk is the possibility of loss from changes in market variables such as share prices, interest rates, exchange rates, or commodity prices. Broad economic shocks can affect many investments together. The size of the exposure, its sensitivity, and the investor's horizon influence the impact, while diversification may offer limited protection against common market movements.
Illustrative example
A sudden increase in interest rates can lower the value of several bond holdings at once, even when their issuers remain able to repay.
What to consider
Historical relationships and risk models can break down. Portfolio diversity does not remove the possibility of a broad, simultaneous decline.
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