What is defined as the risk related directly to leverage in financial investments?

Financial risk specifically pertains to the potential for loss associated with the use of leverage in financial investments. Leverage involves borrowing funds to invest, which can amplify both gains and losses. When an investor uses leverage, they increase their exposure to fluctuations in asset prices because they are obligated to repay borrowed funds regardless of the performance of the investment. This direct correlation between leverage and the potential for increased financial loss due to market movements defines financial risk.

In contrast, market risk refers to the risk of losses due to changes in market prices, independent of the influence of leverage. Systematic risk encompasses broader economic factors affecting all investments, rather than the specific risks associated with financial instruments or leverage. Operational risk arises from failures in internal processes, systems, or external events, which is not directly related to leveraging investments. Therefore, financial risk is the most accurate term for the risk attributable to the use of borrowed capital in investment strategies.