Residual variance is the proportion of variation in the dependent variable of a regression that is left unexplained by the independent variables. A multi-factor model is a top-down approach to measuring operational risk that uses macroeconomic factors to explain a firm’s stock returns. What is left unexplained by the model is considered aggregate operational risk. Scenario analysis is a top-down approach that does not use regression analysis. Reliability and connectivity models are bottom-up approaches. | 
