Which risk pertains to sudden changes in market direction affecting interest rates and equities?

Market risk is the correct choice because it encompasses the potential for losses due to fluctuations in market prices, which can arise suddenly from changes in interest rates and equity values. This type of risk is inherently tied to the overall movements in the financial markets and can affect a wide range of financial instruments.

When market conditions shift—whether due to economic indicators, geopolitical events, or changes in investor sentiment—the weights of interest rates and equity markets may drastically alter, leading to significant impacts on investment portfolios. This risk is systematic in nature, meaning it cannot be eliminated through diversification, as it affects all companies and assets to varying degrees based on the prevailing market conditions.

The other types of risk mentioned do not specifically address the concept of sudden market direction changes in the same way. Second-order risk generally refers to risks that are influenced by changes in factors that affect other risks, while first-order risk is often used to describe immediate, direct risks that investors face. Liquidity risk focuses on the inability to buy or sell assets without causing a significant impact on their price, which is distinctly different from the broader fluctuations characterized by market risk.