What describes the risk of losing investment value due to economic changes?

The concept in question refers to systematic risk, which encompasses the potential for loss in the value of investments due to changes in the overall economic environment. This type of risk is inherent in the market and affects all securities to some extent. Factors contributing to systematic risk include interest rate changes, inflation, political instability, and economic downturns.

Systematic risk cannot be eliminated through diversification, as it impacts the entire market rather than individual assets. Investors cannot control these external factors, making it essential to consider their potential impact when making investment decisions. Recognizing systematic risk helps investors develop strategies for risk management and asset allocation.

Other types of risk, such as unsystematic risk, relate to individual assets or companies and can often be mitigated through diversification. Liquidity risk involves the difficulty of selling an investment without impacting its price, while credit risk pertains to the possibility of a borrower defaulting on a loan. These risks are more specific and do not encompass the broader economic changes that characterize systematic risk.