What does sector risk pertain to?

Sector risk pertains to the overall health of a specific sector of the economy. This type of risk is associated with the potential impact that changes within a particular sector can have on all investments within that sector. For example, if the healthcare sector is adversely affected by regulatory changes or economic downturns, investments in healthcare stocks are likely to suffer, regardless of the individual performance of those companies. Understanding sector risk is crucial for investors as it helps them evaluate how macroeconomic factors can influence their investments across specific segments of the market. This comprehension aids in making informed decisions regarding asset allocation and diversification, considering how correlated the performance of different securities can be within the same industry.