Which factor could lead to an increase in market risk?

An increase in market risk is often associated with broader economic factors that affect the overall market rather than the performance of individual companies. Changes in interest rates can significantly impact the market because they influence borrowing costs and consumer spending, as well as investor expectations for returns. When interest rates rise, the cost of debt increases, which can lead to lower profits for companies and a decrease in investment spending. This can create uncertainty in the market and lead to higher volatility, increasing market risk.

In contrast, positive company earnings reports typically boost investor confidence and can reduce market risk by indicating strong performance. Increased consumer spending can also indicate economic growth and stability, which is generally associated with lower market risk. Stable economic conditions tend to create a predictable environment for investors, thus reducing the overall risk in the market. Therefore, it is the fluctuations in interest rates that play a critical role in affecting market risk.