What is an example of a factor that contributes to market risk?

Market risk refers to the potential for investment losses due to factors that affect the overall performance of financial markets. One significant factor that contributes to market risk is the overall economic environment. This includes macroeconomic indicators such as inflation rates, unemployment rates, economic growth, and geopolitical events. Changes in the economic environment can lead to shifts in investor sentiment, affecting asset prices across multiple sectors and leading to widespread impacts that are not isolated to individual companies or sectors.

The overall economic environment influences demand for goods and services, affects corporate earnings, and can lead to changes in government policies, which in turn impact market stability. For instance, during economic downturns, consumer spending typically decreases, which can negatively affect companies even if they have strong individual performance or operational efficiency. Therefore, this broad and systemic nature of the economic environment makes it a key contributor to market risk, as it can create fluctuations in market prices unrelated to a specific company's performance.