Which of the following is a source of market risk?

• A. Stable demand for a product
• B. Government-imposed price controls
• C. Unexpected changes in consumer preferences
• D. Fixed production costs

Answer: (C)

Verified step by step guidance

1. Understand the concept of market risk: Market risk refers to the uncertainty and potential financial loss that arises from changes in market conditions affecting the demand, supply, or prices of goods and services.
2. Analyze each option in terms of market risk: - Stable demand for a product implies predictability and low uncertainty, so it is not a source of market risk. - Government-imposed price controls can create risk by limiting prices, but this is more related to regulatory risk rather than market risk. - Unexpected changes in consumer preferences directly affect demand unpredictably, which is a classic source of market risk. - Fixed production costs are related to cost structure and do not directly cause market risk.
3. Identify that unexpected changes in consumer preferences cause fluctuations in demand, which can lead to uncertainty in sales and revenues, thus representing market risk.
4. Conclude that among the options, 'Unexpected changes in consumer preferences' is the correct source of market risk because it introduces uncertainty in the market environment.
5. Remember that market risk is primarily about unpredictable changes in market conditions, especially demand and prices, which affect firms' revenues and profitability.