Operational risk is most poorly defined because:
A. the definition of human risk changes periodically.
B. it is a component of overall market risk.
C. it is poorly correlated with exchange rate risk.
D. it is difficult to measure accurately.
Answer:D
Operational risk is the most poorly defined component of a firm’s overall risk because among other things, it is difficult to measure accurately. The human risk component of operational risk is well defined but is also difficult to measure. Operational risk is not a component of market risk and correlation with exchange rate risk is irrelevant.