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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A risk manager argues that operational risk differs from market and credit risk in an important way. Which statement best captures this difference?

Operational risk is generally not rewarded with an explicit risk premium and arises as a by-product of running the business, whereas market and credit risks are deliberately assumed to earn expected returns. It is mainly a downside exposure and cannot be simply diversified away.

  1. AOperational risk is taken on voluntarily in exchange for an expected return, whereas market and credit risks are not
  2. BOperational risk generally has no explicit risk premium and is largely incidental to conducting business, unlike market and credit risk that are deliberately assumed for returnCorrect
  3. COperational risk can be fully eliminated by diversification, whereas market and credit risk cannot
  4. DOperational risk produces only symmetric gains and losses, whereas market risk produces only losses

Explanation

Market and credit risk are taken deliberately to earn compensation, while operational risk is a by-product of doing business with no direct reward for bearing it. It is not fully diversifiable and it is mainly a loss exposure, so the other options are wrong.

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