Which type of risk encompasses the possibility of both profit and loss?

Speculative risk refers to situations where there is a possibility of experiencing either a profit or a loss. This type of risk is commonly associated with investments, business ventures, and other activities where outcomes can fluctuate, leading to potential gains or losses. Unlike pure risk, where outcomes are limited to either loss or no loss (for example, in the case of property damage or illness), speculative risk inherently involves uncertainty that can result in varying financial outcomes.

In many cases, individuals or companies engage in speculative risks with the expectation that the potential rewards will outweigh the chances of loss, exemplifying the inherent nature of this type of risk. For instance, investing in the stock market or starting a new business involves taking on speculative risks because while there is a chance of losing money, there is also the possibility of significant financial gain. This dual nature of outcomes is what distinctly characterizes speculative risk and sets it apart from other types of risk that focus solely on loss.