What does 'operational risk' encompass?

Operational risk encompasses risks arising from the day-to-day business operations of an organization. This includes the potential for loss resulting from inadequate or failed internal processes, people, systems, or from external events affecting those operations. Examples of operational risks can range from technical system failures and human error to fraud and natural disasters that disrupt business activities.

Understanding operational risk is essential for organizations as it highlights vulnerabilities in operational processes, allowing businesses to implement strategies and controls to mitigate these risks effectively. This element of risk management is critical because it affects an organization's ability to deliver products and services, maintain compliance, and achieve overall operational efficiency.

The other options point to risks that, while they may be significant for businesses, do not fall under the category of operational risk specifically. Investment-related risks pertain to asset management and financial performance, while risks from market volatility relate to fluctuations in market conditions that can impact the valuation of investments. Lastly, risks associated with brand reputation involve how an organization is viewed by the public and can be tied to marketing, customer service, and public relations rather than day-to-day operational processes.