What type of risk involves only the potential for loss?

The correct answer identifies pure risk, which is characterized by the potential for loss with no possibility of financial gain. This type of risk encompasses situations where outcomes can only result in a loss or no loss, such as natural disasters, theft, or illness. In these scenarios, an individual or entity faces exposure to adverse effects without any aspect of chance that might yield a profitable outcome.

Understanding pure risk is crucial in personal finance and investment decisions, as it helps in assessing risks related to insurance, health, and property. For instance, when considering property insurance, one is primarily concerned about the potential losses due to fire or theft, which are pure risks.

In contrast, speculative risk includes the chance of both loss and gain, such as investing in stocks, where market fluctuations can lead to profits or losses. Operational risk relates to losses stemming from operational failures within an organization, and financial risk pertains to the potential loss due to financial market fluctuations, debt, or other financial instruments. These types of risk encompass a broader range of outcomes, thereby differentiating them from pure risk, which remains strictly focused on the possibility of experiencing a loss.