Market risk

What is market risk?

Market risk is the risk of losses in investments due to changes in market prices. It is also known as investment risk. Market risk includes the risk of loss due to changes in the prices of stocks, bonds, commodities, and currencies. Changes in the prices of these assets can be caused by economic, political, or social events. Market risk is a type of financial risk.

Types of market risk

There are four types of market risk: interest rate risk, equity risk, currency risk, and commodity risk.

Interest rate risk

Interest rate risk is the risk of losses in investments due to changes in interest rates. When interest rates rise, the value of investments falls. This is because investors can get a higher return on their money by investing in other assets. For example, if you have a bond that pays 5% interest and interest rates rise to 6%, the value of your bond will fall.Interest rate risk is a type of market risk. It is also known as interest rate risk, bond risk, or fixed-income risk.

Equity risk

Equity risk is the risk of losses in investments due to changes in the prices of stocks. When the stock market falls, the value of stocks falls. This is because investors can get a higher return on their money by investing in other assets. For example, if you have a stock that is worth $100 and the stock market falls by 10%, the value of your stock will fall to $90.Equity risk is a type of market risk. It is also known as stock risk or equity price risk.

Currency risk

Currency risk is the risk of losses in investments due to changes in exchange rates. When the value of a currency falls, the value of investments in that currency also falls. For example, if you have an investment in Japanese yen and the value of the yen falls against the US dollar, the value of your investment will fall.Currency risk is a type of market risk. It is also known as exchange rate risk or FX risk.

Commodity risk

Commodity risk is the risk of losses in investments due to changes in the prices of commodities. When commodity prices fall, the value of investments in commodities also falls. For example, if you have an investment in gold and the price of gold falls, the value of your investment will fall.Commodity risk is a type of market risk. It is also known as commodity price risk.

Measuring market risk

There are two ways to measure market risk: VaR and CVaR.

VaR

VaR is short for Value at Risk. VaR is a statistical measure of the risk of losses in investments. VaR measures the maximum loss that an investment can suffer over a given period of time. VaR is usually measured over a one-year period.

CVaR

CVaR is short for Conditional Value at Risk. CVaR is a statistical measure of the risk of losses in investments. CVaR measures the expected loss that an investment can suffer over a given period of time. CVaR is usually measured over a one-year period.

Managing market risk

There are two ways to manage market risk: hedging and diversification.

Hedging

Hedging is a way to reduce the risk of losses in investments. Hedging is done by buying or selling assets to offset the risk of losses in other investments. For example, if you have a stock portfolio and you are worried about a fall in the stock market, you can hedge your portfolio by buying bonds. If the stock market falls, the value of your bonds will rise and offset the losses in your stocks.Hedging is a type of risk management. It is also known as risk mitigation or risk management.

Diversification

Diversification is a way to reduce the risk of losses in investments. Diversification is done by investing in a variety of assets. This way, if one investment loses value, the other investments will offset the losses. For example, if you have a portfolio that consists of only stocks, you can diversify your portfolio by adding bonds. If the stock market falls, the value of your bonds will rise and offset the losses in your stocks.Diversification is a type of risk management. It is also known as portfolio diversification or investment diversification.

Market risk and you

As an investor, you are exposed to market risk. This means that you can lose money if the markets fall. To protect yourself from market risk, you can do two things: hedging and diversification.

Hedging

Hedging is a way to reduce the risk of losses in investments. Hedging is done by buying or selling assets to offset the risk of losses in other investments. For example, if you have a stock portfolio and you are worried about a fall in the stock market, you can hedge your portfolio by buying bonds. If the stock market falls, the value of your bonds will rise and offset the losses in your stocks.

Diversification

Diversification is a way to reduce the risk of losses in investments. Diversification is done by investing in a variety of assets. This way, if one investment loses value, the other investments will offset the losses. For example, if you have a portfolio that consists of only stocks, you can diversify your portfolio by adding bonds. If the stock market falls, the value of your bonds will rise and offset the losses in your stocks.

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