What is the impact of currency risk on systematic risk?

Currency risk refers to the potential change in the value of an investment due to fluctuations in exchange rates. This risk is particularly relevant for investors holding foreign investments, as adverse shifts in currency values can lead to lower returns or even losses when converting back to the investor's home currency.

The choice stating that it can negatively affect the value of foreign investments is accurate because when the currency of the investment depreciates relative to the investor's home currency, the overall value of the investment diminishes when measured in the domestic currency. This creates a direct negative impact on the returns expected from those foreign investments, making them riskier and influencing the overall level of systematic risk an investor faces. Systematic risk encompasses risks that affect an entire market or a segment of the market, and currency risk is a component of that as it can lead to broader economic consequences, such as reduced international trade and investment flows.

In short, the negative effects of currency fluctuations on foreign investments clearly illustrate how currency risk contributes to systematic risk in a financial context.