Final answer:
Financial Risk is associated with market forces affecting financial assets and liabilities. It involves multiple risk factors, including market, credit, liquidity, and price risks. Understanding expected returns, associated risks, and liquidity are key considerations for investors and suppliers of funds in the financial markets.
Step-by-step explanation:
A risk arising from the effect of market forces on financial assets or liabilities that includes market risk, credit risk, liquidity risk, and price risk is known as Financial Risk. It is a type of economic risk over which an individual has limited control, and it can stem from various unforeseen events such as natural disasters, wars, or massive unemployment.
Financial Risk is critical to understand for both firms trying to raise capital and households and individuals supplying funds, as they are all part of the financial markets aimed at providing a suitable combination of rate of return, risk, and liquidity.
When analyzing the risk involved in different types of financial assets, considerations such as the expected rate of return, the risk of return deviating from the expected, and the liquidity of the investment are crucial. Understanding the differences between these factors can greatly aid investors and households in making informed decisions in the financial market.