Certified Financial Management Specialist Practice Exam

What type of risk encompasses losses related to operational failures such as technology breakdowns?

1. Market Risk

2. Operational Risk

3. Reputational Risk

4. Liquidity Risk

The correct answer is: Operational Risk

Operational risk encompasses losses that arise from failures in internal processes, systems, or human errors, as well as from external events. This type of risk is particularly focused on day-to-day operations, which includes not only technology breakdowns but also issues such as fraud, or compliance failures. By clearly defining operational risk in this way, it becomes evident that it focuses on the internal mechanisms that keep an organization functioning smoothly. Market risk, on the other hand, refers to losses that arise due to changes in market prices that can affect investments, while reputational risk relates to potential damage to a company’s reputation that can lead to loss of business. Liquidity risk deals with the possibility that an entity will not have enough cash or liquid assets to meet its short-term obligations. Each of these alternatives falls outside the specific scope of operational failures linked directly to technology or internal processes.