FINRA Practice Exam 2025 – All-in-One Guide to Succeed in Financial Industry Certification!

The risk associated with the volatility of a capital market investment is systematic risk. This type of risk, also known as market risk, pertains to the potential for an investment to experience fluctuations in value due to factors that affect the entire market or specific segments of it, such as economic changes, political events, or natural disasters.

Systematic risk cannot be eliminated through diversification because it is inherent to the entire market or economy. Investors recognize this risk when they consider the impact of overall market movements on their investments. Hence, understanding systematic risk is critical for making informed investment decisions, as it helps investors gauge how their investments may perform in varying market conditions.

The other types of risks mentioned are relevant in different contexts. Credit risk pertains specifically to the potential failure of a borrower or counterparty to meet their obligations, while interest rate risk relates to the impact of changes in interest rates on the value of an investment, particularly in fixed-income securities. Liquidity risk refers to the difficulty of buying or selling an asset without causing a significant impact on its price. Each of these risks is significant in its own right but does not specifically address the broader market volatility recognized in systematic risk.