What type of risk involves both the potential for loss and the possibility for gain?

Speculative risk is characterized by the presence of both a possibility of gain and a potential for loss. This type of risk typically arises in situations involving investments and business ventures, where outcomes can lead to profits or financial setbacks. Unlike pure risk, which results in loss or no loss (and does not offer any potential for gain), speculative risk embodies uncertainty where stakeholders may either lose their investment or profit from it.

For example, investing in stocks represents speculative risk because the value of the investment can rise, resulting in a profit, or fall, leading to a loss. In contrast, pure risk would apply to scenarios like natural disasters or illness, which only present a risk of loss without the chance of a positive outcome. Understanding the differences between these types of risks is vital for both individuals and businesses when making informed decisions.