What is an example of pure risk?

Pure risk is defined as a risk that presents only the possibility of loss or no loss, without any chance for a profit. It typically involves scenarios where the potential outcomes are negative or neutral, with no opportunity for gain.

When considering the options, a natural disaster causing property damage is a clear example of pure risk, as it only involves the potential for loss—either your property is damaged, or it remains intact. There is no opportunity for profit; the outcome is strictly binary in terms of loss.

In contrast, investing in the stock market, starting a new business venture, and buying a stock option all involve speculative risks, where both potential gains and losses exist. These scenarios allow for the possibility of earning a profit, distinguishing them from pure risks, which lack that potential for financial gain.