Certified Financial Management Specialist Practice Exam

What is a common effect of market risk on investments?

1. Inability to repay loans

2. Loss of investment value

3. Increased capital reserves

4. Higher consumer demand

The correct answer is: Loss of investment value

Market risk, often referred to as systematic risk, is the possibility that an investment's value will decline due to factors that affect the overall market. This can include economic changes, political events, changes in interest rates, and widespread market sentiment. When market conditions deteriorate, the value of investments can fall significantly, even if the specific businesses or assets have not changed fundamentally. Thus, the common effect of market risk is a loss of investment value, which reflects the inherent volatility in financial markets. Investors experience this risk when they hold securities such as stocks or bonds, as these investments are often subject to market fluctuations influenced by macroeconomic trends. This aspect of market risk directly concerns all investors because it impacts their portfolio's overall performance, regardless of how well individual investments are managed. Monitoring market conditions and understanding the broader economic environment can help investors anticipate changes in investment value due to market risk.