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Market risk is the risk that the value of an investment will decrease due to changes in market factors.
The risk is that the investment’s value will decrease. Market risk is also sometimes called as systematic risk, and it refers to a specific currency or commodity. Market risk is generally expressed in annualized terms, either as a fraction (8%) of the initial value or an absolute number (INR 9).
Sources of market risk include recessions, changes in interest rates, political turmoil, natural disasters and terrorist attacks. The most basic strategy for minimizing market risk is diversification. A Portfolio which is well-diversified consists of securities from various industries, asset classes with varying degrees of risk. Diversification doesn't remove the risk entirely, but it definitely limits the risk, as there are many instruments performing in the portfolio.
To measure market risk, analysts use the value-at-risk (VaR) method. VaR is a measure of the risk of loss for investments. It is a statistical risk management method that quantifies a stock or portfolio's potential loss as well as the probability of loss occurring. But, the VaR method requires certain assumptions that limit its precision.
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There are several different risk factors that make up market risk.