Explanation:
The statement that we can have large diversification benefits when operational risk is aggregated with other risks is accurate. This is because operational risk tends to behave independently, unlike credit and market risks, which often show increased correlations during a crisis. Therefore, by aggregating operational risk with other types of risks, a firm can achieve large diversification benefits.
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Q.5105 A risk manager of a large bank recommends that the bank should consider not only regulatory and economic capital requirements but also assess aggregate capital needs. Which of the following statements is correct regarding capital aggregation and diversification in the ERM context?
A
Diversification can only be achieved across different risk classes
B
To determine the risk capital for a particular business unit within a larger firm, each unit is viewed individually.
C
We have diversification benefits whenever we have a correlation of exactly +1
D
We can have large diversification benefits when operational risk is aggregated with other risks
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