Certified Financial Management Specialist Practice Exam

Which risk involves the potential loss of investment value due to fluctuations in the market?

1. Operational Risk

2. Liquidity Risk

3. Market Risk

4. Reputational Risk

The correct answer is: Market Risk

Market risk is the correct choice because it specifically refers to the potential for an investor to experience losses due to fluctuations in the market value of securities. These fluctuations can be caused by various factors, including changes in economic indicators, interest rates, political events, or other external factors that impact the overall market. This type of risk is inherent to all forms of investment and is a fundamental concept in finance, highlighting how external market conditions can significantly affect asset prices. In contrast, operational risk relates to losses resulting from inadequate or failed internal processes, systems, or policies within an organization, rather than external market movements. Liquidity risk involves the inability to buy or sell assets quickly without significantly affecting their price, which is not directly tied to the value fluctuations of the overall market. Reputational risk refers to the potential loss of value due to harm to a company’s reputation, which can impact business operations and stakeholder relationships but is distinct from market-related fluctuations.