Pure Risk

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Definition of 'Pure Risk'

Pure risk is a type of risk that does not create any potential for gain. In other words, pure risk is a situation in which there is only the possibility of loss.

There are two main types of pure risk:

* **Speculative risk** is a type of risk that has the potential for both gain and loss. For example, investing in stocks is a speculative risk because there is a chance that the value of the stock will increase, but there is also a chance that it will decrease.
* **Pure risk** is a type of risk that only has the potential for loss. For example, if your house burns down, you will lose your home and all of your belongings.

Pure risk is an important concept in finance because it helps to distinguish between different types of risk. This distinction is important because different types of risk require different types of management strategies.

For example, speculative risk can be managed through diversification, which is the process of investing in a variety of different assets. This helps to reduce the overall risk of your portfolio because if one asset loses value, the other assets in your portfolio may make up for the loss.

Pure risk, on the other hand, cannot be managed through diversification. The only way to manage pure risk is to purchase insurance. Insurance is a contract between an insurance company and a policyholder. In exchange for a premium, the insurance company agrees to pay the policyholder a sum of money if a certain event occurs.

In the case of pure risk, the event that triggers the insurance payment is usually a loss. For example, if you purchase homeowners insurance, the insurance company will pay you a sum of money if your house burns down.

Insurance is an important tool for managing pure risk because it can help to protect you from financial loss. However, it is important to remember that insurance is not a guarantee against loss. Insurance companies can go bankrupt, and even if your insurance company does not go bankrupt, they may not be able to pay your claim if there is a large number of claims filed at the same time.

As a result, it is important to carefully consider the risks that you are facing before purchasing insurance. You should also make sure that you understand the terms of your insurance policy before you sign it.

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