What type of risk is associated with the direction of interest rates, equities, and currencies?

The correct answer is market risk. Market risk refers to the potential for an investor to experience losses due to factors that affect the overall performance of the financial markets. This type of risk encompasses fluctuations in interest rates, stock prices, and foreign exchange rates, as these variables can have significant impacts on investment returns.

Market risk is inherent to all financial instruments and cannot be eliminated through diversification; rather, it can only be mitigated with strategic asset allocation and risk management practices. For instance, rising interest rates may affect bond prices negatively, while equities could be impacted by changing economic conditions, thus illustrating how interconnected these factors are within the larger market environment.

Other options like second-order risk, first-order risk, and drawdown risk do not directly capture the breadth of this influence. Second-order risk generally refers to risks related to the implications of market pricing changes, while first-order risk involves directly observable fluctuations in prices. Drawdown risk focuses on the peak-to-trough decline in an investment’s value. While they are important concepts, they do not encompass the wider impact of changing interest rates, equities, and currencies as market risk does.