DECA+ Business Management and Administration Practice Exam

What is meant by market risk?

1. Potential for gaining profits quickly

2. Financial loss due to decreased investment value

3. The risk of operational inefficiencies

4. Changes in regulatory compliance

The correct answer is: Financial loss due to decreased investment value

Market risk refers to the potential for a financial loss that arises from fluctuations in the market value of an investment. This type of risk is primarily associated with changes in overall market trends, such as economic downturns, shifts in consumer behavior, or changes in interest rates. As the market value of investments can decrease due to various factors, investors face the possibility that their holdings may lose value, leading to financial loss. The choice that specifies financial loss due to decreased investment value is correct because it captures the essence of market risk. For example, if a stock that an investor holds decreases in value due to market volatility, that investor experiences market risk, and this loss can be significant depending on the extent of the market movement. In contrast, potential for gaining profits quickly does not accurately define market risk, as it focuses on the upside rather than the potential losses. Operational inefficiencies relate to how effectively a company runs its internal processes, and while they can impact profitability, they do not encompass market risk. Finally, changes in regulatory compliance pertain to the legal and regulatory environment in which businesses operate, which is a separate area of risk known as regulatory risk, rather than market risk itself.