What Is a Market Risk Analysis?

Jim B.

A market risk analysis is the process of studying the risks that an investor’s portfolio faces in an effort to mitigate those risks. Different risks are associated with the different categories of securities, so it can be helpful for investors to study those risks closely, evaluating how likely their portfolios are to be exposed to specific threats, and how serious the impact would be if they were exposed. In addition, a market risk analysis should take into account the risks involved with various sectors of the market. Another way that this term is used is to describe the analysis that a business performs before venturing into a specific market for the first time.

A market risk analysis, if performed effectively, can uncover investment risks.
A market risk analysis, if performed effectively, can uncover investment risks.

When people think about investing, they often think in terms of the positive benefits of investing; after all, the purpose of investment is to make passive wealth grow. Investing also comes with the very real risk that a good deal of capital may be lost, though. To minimize the risks associated with normal investing, investors can perform — or hire a financial services professional to perform — a market risk analysis.

Different risks are associated with the different categories of securities.
Different risks are associated with the different categories of securities.

There are many different ways for a market risk analysis to be performed. Investment professionals often perform hypothetical stress tests to see how a portfolio would hold up in a worst-case scenario. Another popular tool is the "Value at Risk" calculation, or VaR, which uses the past price performance and inherent volatility of securities as a way of assessing portfolio risk. These and many other tools allow analysts to find out where portfolios are vulnerable and how they can be adjusted to compensate.

Each different class of securities is associated with a specific set of risks, and a market risk analysis, if performed effectively, can uncover these risks. For example, stocks are risky because the prices could plummet and thereby devalue the shares held by investors. By contrast, bond investors have to worry about the possibilities of issuing institutions defaulting or interest prices rising. Whatever the security, a risk analyst can parse through the risks involved and find ways to alleviate them.

Businesses might also take advantage of a different type of market risk analysis to find out whether expansion into a novel market is worth the risk involved. A company that is used to doing business in a specific area might not be aware of all of the issues attached to a new market. For that reason, a proper analysis can answer a lot of pertinent questions and provide peace of mind to company managers.

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Discussion Comments


@ddljohn-- The analysis depends on the kind of investment and various factors of that market.

For the most part, the market risk analyst will look at the type of circumstances that may come about and then will make assumptions on how much these may cost the investor.

This gives the investor an idea of whether he or she would hold up in a crisis or if they will lose more than they can bear.

Analysts use mathematical calculations to make these assumptions. The value at risk analysis, for example, is a purely mathematical calculation.

Of course, like it was mentioned in the other comment, these are all hypothetical. A market analyst basically lays out the worst scenario. But if an investor is prepared for the worst scenario, they will do well. So the fact that the analysis is hypothetical doesn't take away from its benefits.


What kind of an analysis would a market risk analyst make for an investor? And what kind of recommendations would he make to prevent them?


It's always a good idea to get a market risk analysis and I make sure to get one for my portfolio routinely.

At the same time though, the future is unknown and it's impossible to predict what might happen with the market in the future.

I do my best to reduce risk with my investments, but I also know that I can suffer from a sudden loss despite all my precautions.

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