Market risk refers to the potential for losses arising from broad market movements that affect entire asset classes or markets simultaneously. Also known as systematic risk, this type of risk cannot be eliminated through diversification within the same asset class. Market risk affects all market participants and is driven by economic, political, and global factors.

Market risk management involves diversification across asset classes, geographic regions, and time periods, along with hedging strategies using derivatives or inverse instruments. Understanding market risk helps traders assess portfolio vulnerability to broad market movements and implement appropriate risk management strategies. Stress testing and scenario analysis help quantify potential market risk impacts.

Real-world example: During the COVID-19 market crash, broad market risk caused most stocks to decline simultaneously, with diversified portfolios unable to avoid losses as systematic risk overwhelmed individual security selection and traditional diversification benefits.