What is a primary characteristic of market risk?

Market risk is characterized by the potential for losses due to factors that affect the overall performance of the financial markets. This risk arises from broad market movements that can impact the value of investments across various sectors and not from specific events relating to an individual company or industry. It is influenced by changes in economic conditions, political events, changes in interest rates, inflation, and other variables that can affect the entire market landscape.

Unlike risks that are associated with specific companies or industries, which are considered unsystematic risk, market risk (or systematic risk) cannot be completely eliminated through diversification. Investors should understand that fluctuations in stock prices, for example, are often tied to overarching trends within the economy rather than individual company performance alone. Hence, option B accurately captures this gist of market risk and its broader implications.

The other choices mischaracterize market risk. Predictability and manageability don’t apply as market risk is inherently uncertain. Its universal effect makes the notion of it being limited to domestic markets incorrect, and while some industries may react more acutely to certain market risks, the nature of market risk itself encompasses the entire market rather than being confined to specific sectors.