Differentiate between pure risk and speculative risk? Give example
Pure Risk: Pure risk is a type of risk that has only two possible outcomes: loss or no loss. There is no chance of gaining anything, only the risk of a negative outcome. Pure risk is typically insurable and includes events that are beyond our control, such as accidents, natural disasters, or illnesses.
Example: A person buying insurance to protect their house against damage due to a fire is an example of pure risk. The person is only concerned about the potential loss that might occur in the event of a fire, without any possibility of gaining anything from it.
Speculative Risk: Speculative risk is a type of risk where there is a possibility of both gain and loss. Unlike pure risk, speculative risk involves a level of uncertainty about the outcome, and it is generally not insurable. Speculative risk arises from decisions made to engage in activities that have uncertain outcomes, often involving the chance to make a profit or suffer a loss.
Example: Investing in the stock market is a common example of speculative risk. When purchasing stocks, there is a possibility of making a profit if the stock price increases, but also a risk of losing money if the stock price decreases.