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

A risk manager contrasts operational risk with market and credit risk. Which statement best describes a distinguishing characteristic of operational risk?

Operational risk is generally not rewarded with a risk premium and arises as a by-product of conducting business, unlike market and credit risk, which firms deliberately take for expected return. It is not limited to technology and cannot be fully diversified away.

  1. AIt is taken on deliberately in expectation of a return premium
  2. BIt is generally not rewarded with a risk premium and arises as a by-product of doing businessCorrect
  3. CIt can be fully eliminated by diversification across business lines
  4. DIt is limited to losses arising from technology failures

Explanation

Market and credit risks are knowingly assumed for expected return, whereas operational risk arises from running the business and has no direct reward. It cannot be fully diversified away and covers far more than technology, including people, processes and external events.

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