What term describes the potential to incur a financial loss due to uncertainties in investment outcomes?

The term that describes the potential to incur a financial loss due to uncertainties in investment outcomes is market risk. Market risk arises from fluctuations in the prices of securities caused by various market variables such as economic changes, interest rates, and investor sentiment. It encompasses the risk that the value of a portfolio or an asset may decline due to these market forces, thereby impacting the overall return on investment.

Understanding market risk is crucial for investors since it cannot be completely eliminated; rather, it can be managed through diversification or hedging strategies. By recognizing and addressing market risk, investors are better equipped to anticipate potential losses arising from adverse market movements, leading to more effective risk management and investment decision-making.

Other risks, such as credit risk or liquidity risk, pertain to specific aspects of investment, but it is market risk that fundamentally captures the essence of uncertainty in investment outcomes across the broader market environment.