What are the three main types of risk associated with investing?

The identification of market risk, credit risk, and liquidity risk as the three main types of risk associated with investing is particularly relevant because it covers fundamental concerns that every investor faces.

Market risk refers to the potential for losses due to fluctuations in the overall market. This type of risk is inherent in any investment and can affect asset prices across the board, due to economic factors, investor sentiment, or global events. Understanding market risk is crucial because it affects the value of all investments, whether they are stocks, bonds, or other assets.

Credit risk pertains to the possibility that a borrower will default on their financial obligations, failing to repay loans or bonds as promised. Investors must assess the creditworthiness of entities—be they corporations or governments—when investing in fixed-income securities. Proper evaluation of this risk helps in making informed investment decisions and mitigating potential losses.

Liquidity risk involves the ease with which an asset can be bought or sold in the market without affecting its price significantly. Investors generally prefer assets that can be quickly converted to cash without substantial price changes. Understanding this risk is essential for maintaining investment flexibility, especially in volatile markets.

Though the other options introduce different aspects of risk, they do not collectively address the most critical components that directly influence investment decisions as clearly as