Which of the following best describes market risk?

• A. The risk from investments in foreign markets
• B. The potential for losses due to market fluctuations
• C. The risk of a company's bankruptcy
• D. The risk associated only with fixed income securities

Answer: (B)

Market risk refers to the potential for losses in an investment portfolio due to overall market fluctuations rather than the specific risk associated with individual securities. This type of risk affects all assets in the market and can arise from various factors, including economic shifts, changes in investor sentiment, interest rate movements, and geopolitical events.

Answer B captures this definition by highlighting the idea that losses can occur as a result of broad market variability, which can impact all investments, regardless of the sector or asset class. The overall movement of the market, whether it goes up or down, creates inherent risk for all investments, which is the essence of market risk.

Other options do focus on specific concerns but do not encapsulate the broader nature of market risk. For example, investments in foreign markets might introduce additional levels of risk, but that is not universally applicable to all market environments. The risk of a company's bankruptcy pertains more to credit risk or company-specific risk rather than market-wide risk. Lastly, limiting market risk to fixed income securities is too narrow, as market risk can affect all types of investments, including equities and real assets.