DECA+ Business Management and Administration Practice Exam

Which financial approach helps in mitigating exposure to fluctuations in investment value?

1. Capital budgeting

2. Market risk management

3. Cost-volume-profit analysis

4. Investment diversification

The correct answer is: Market risk management

The financial approach that helps in mitigating exposure to fluctuations in investment value is market risk management. This involves identifying, analyzing, and responding to risk factors that can affect an investment portfolio's value. By employing various strategies, such as hedging through options, futures, and other financial instruments, businesses and investors can minimize the impact of adverse market movements on their investments. Market risk management entails continuously monitoring market trends, economic indicators, and the performance of assets within a portfolio. This proactive approach is crucial for managing the potential losses that could arise from price volatility in the financial markets. Therefore, employing effective market risk management techniques is fundamental for maintaining stability and protecting investments from unpredictable fluctuations in value. While other approaches like capital budgeting, cost-volume-profit analysis, and investment diversification can contribute to overall financial strategy and risk management, they do not specifically focus on the direct mitigation of risks associated with market fluctuations in investment value. Capital budgeting primarily deals with long-term investment decisions, cost-volume-profit analysis focuses on the relationship between costs, sales volume, and profits, and while investment diversification is valuable for spreading risk, it is not a comprehensive strategy for directly managing market risk.