What is a common characteristic of market risk?

Market risk, often referred to as systemic risk, is characterized by its impact on all investments in the market rather than on a specific company or industry. The key characteristic of market risk is that it affects individual stock prices in coherence with the broader market. When market conditions change—such as economic downturns, interest rate fluctuations, or geopolitical events—individual securities typically react in a similar manner to the overall market movements. This correlation persists regardless of a company's specific performance, underscoring how market risk encompasses factors that impact the entire market or market segments.

Options that suggest market risk is limited to specific companies or is consistent across all industries do not capture the essence of market risk, as this risk spans across different industries simultaneously, shaped by broader economic factors. Similarly, while diversification can reduce specific risks associated with individual stocks, it cannot eliminate market risk, because systematic risk affects all securities to some extent. Thus, the perspective that market risk influences stock prices in tandem with the broader market accurately captures its inherent characteristics.