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In: Finance

What are the core differences between Market Risk and Price Risk?

What are the core differences between Market Risk and Price Risk?

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Answer-

Market risk is a systematic risk that causes losses to the investors due to adverse risk for financial markets due to turmoils caused by recessions, political unstability, natural disasters like earthquakes, hurricanes etc and changes in interest rates, exchange rates and inflation.

The various types of  market risks are currency risk, equity risk, currency risk and commodity risk.
Price risk is the risk which causes the price or value of the stock or investment portfolio to decrease.

Market risk cannot be eliminated by diversification whereas Price risk can be eliminated by diversification of stocks or portfolio.
Market risk is a systematic risk or cannot be diversified whereas Price risk is unsystematic risk or can be diversified.
Market risk effects the overall market and most of the stocks across sectors whereas price risk is confined to very few stocks in portfolio or a single stock.

The investor can use various tools and techniques to hedge Price risk which range from making conservative decisions like  buying put options to more aggressive strategies like short selling, whereas the Market risk cannot be hedged and cannot be contained in the event of market turmoil.

jeff jeffy answered 1 year ago
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