Life & Health Insurance Practice Exam

What type of risk is characterized by the possibility of both loss and gain?

1. Pure risk

2. Speculative risk

3. Financial risk

4. Business risk

The correct answer is: Speculative risk

Speculative risk is characterized by the possibility of both loss and gain because it involves situations where there are uncertain outcomes that can lead to either a profit or a loss. This type of risk is most commonly associated with investments, gambling, and entrepreneurial ventures where individuals or companies engage in activities knowing they might earn a return or suffer a loss. For instance, investing in stocks is a classic example of speculative risk; an investor can gain returns if the stock price increases but can also incur losses if the price declines. This dual potential makes speculative risk distinct from pure risk, which only involves the possibility of loss without any chance for gain. The other types of risk, such as financial risk, typically focus on the potential for financial loss in conditions of uncertainty, and business risk relates more specifically to the uncertainties businesses face that can affect their earnings. However, neither of these types of risks inherently includes the possibility of gaining, which is a crucial feature of speculative risk.