Association for Financial Professionals (AFP) Practice Exam 2025 – All-in-One Guide to Master Your Certification!

Market risk refers to the potential for an investor to experience losses due to factors that affect the overall performance of the financial markets. This type of risk is influenced by macroeconomic factors, including changes in interest rates, currency fluctuations, political instability, and broader economic shifts that can lead to market volatility.

The definition characterizes market risk as being related to broad market movements that can impact all investments within the market, rather than individual assets or company-specific issues. While individual investments may underperform due to specific company performance or legal issues, market risk encompasses the risks that affect all securities and asset classes broadly.

This understanding is crucial for investors and financial professionals, as it helps them develop strategies for portfolio diversification and risk management to mitigate the impacts of market fluctuations. In contrast, the other options focus on specific risks tied to individual investments or operational issues, which do not capture the essence of market risk affecting a wide range of assets simultaneously.