3/17/2023 Department of ACFN

Individual Assignment

Elsa Lakew
RIFT VALLEY UNIVERSITY
1. Differentiate the distinction between pure and speculative risks by giving example of each.
Speculative Risk
Speculative risk is a category of risk that, when undertaken, results in an uncertain degree of gain
or loss. Three possible outcomes exist in speculative risk: something good (gain), something bad
(loss) or nothing (staying even). Speculative risk is the possibility that an investment will not
appreciate. Speculative risks are made as conscious choices and are not just a result of
uncontrollable circumstances. Since there is the chance of a large gain despite the high level of
risk, speculative risk is not a pure risk, which entails the possibility of only a loss and no potential
for gains. Assuming speculative risk is usually a choice and not the result of uncontrollable
circumstances.

Speculative risk has opportunities for loss or gain and requires the consideration of all potential
risks before choosing an action. For example, investors purchase securities believing they will
increase in value.

But the opportunity for loss is always present. Businesses venture into new markets, purchase
new equipment, and diversify existing product lines because they recognize the potential gain
surpasses the potential loss.

 For example, sports betting, investing in stocks, and buying junk bonds are some examples
of activities that involve speculative risk.
Pure Risk
Pure risk is a category of risk that cannot be controlled and has two outcomes: complete loss or
no loss at all. There are no opportunities for gain or profit when pure risk is involved. Pure risk is
most used in the assessment of insurance needs. There are no opportunities for gain or profit
when pure risk is involved. Many cases of pure risk are insurable.

Pure risk is generally prevalent in situations such as natural disasters, fires, or death. These
situations cannot be predicted and are beyond anyone's control. Pure risk is also referred to as
absolute risk.

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  For example, should a person damage a car in an accident, there is no chance that the
result of this will be a gain. Since the outcome of that event can only result in a loss, it is a
pure risk. OR
  An insurance company insures a policyholder's automobile against theft. If the car is
stolen, the insurance company must bear a loss. However, if it isn't stolen, the company
doesn't make any gain.

In contrast to speculative risk, pure risk involves situations where the only outcome is loss.
Generally, these sorts of risks are not voluntarily taken on and, instead, are often out of the
control of the investor.

2. Differentiate between personal risk, property risk and liability risks.

Personal Risks
Personal risks directly affect an individual and may involve the loss of earnings and assets  or an
increase in expenses.
 For example, unemployment may create financial burdens from the loss of income and
employment benefits. Identity theft may result in damaged credit, and poor health may
result in substantial medical bills, as well as the loss of earning power and the depletion of
savings.

Property Risks
Property risks involve property damaged due to uncontrollable forces such as fire, lightning,
hurricanes, tornados, or hail.

Liability Risks
Liability risks may involve litigation due to real or perceived injustice. For example, a person
injured after slipping on someone else's icy driveway may sue for medical expenses, lost income,
and other associated damages.

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3. What is the difference between risk and uncertainty? Elaborate them clearly.
The difference between these two terms is that risk is measurable, while uncertainty is not
measurable. In the case of risk, there is a process through which it can be measured; while in
the case of uncertainty, there is no such measurement process.

Uncertainty refers to a process where the future outcome is largely unknown. Therefore, the
probability of an outcome is also unknown in the case of uncertainty. Risk, on the other hand,
has a certain probability of occurring in the future. Therefore, risk can be measured and acted
upon, while uncertainty cannot be treated so.
The risk is defined as the situation of winning or losing something worthy.  Uncertainty is a
condition where there is no knowledge about the future events.
More general, Risk refers to decision-making situations under which all potential outcomes and their
likelihood of occurrences are known to the decision-maker, and uncertainty refers to situations under
which either the outcomes and/or their probabilities of occurrences are unknown to the decision-
maker.
Risk Vs Uncertainty

Basis For Comparison Risk Uncertainty

Definition The probability of winning or losing It implies a situation where
something worthy is known as risk. the future events are not
known.
Ascertainment It can be measured It cannot be measured.
Outcome Chances of outcomes are known. The outcome is unknown
Control Controllable Uncontrollable
Minimization Yes No
Probabilities Assigned Not Assigned
Table 1: the difference between risk and uncertainty
4. Distinguish between peril and hazard, give an example on each.
Peril: - It is an immediate cause of a risk and a specific event causing loss and giving rise to
risk. When a building burns, fire is the peril.
 Examples: - fire, theft, death.

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 Hazard: - It is the source of danger and underlying factor behind the peril that leads to the
probability of a particular loss to the insurer. It is the active ingredient that could create a peril,
which could then lead to a particular loss event. It is also a condition which lies behind the
occurrence of a loss.
5. What is Gambling means? In which kind of risk do we categorize Gambling?
Gambling is the wagering of something of value (the stakes) on a random event with the intent of
winning something else of value, where instances of strategy are discounted. Gambling involves an
element of risk, typically a high probability of loss against a smaller probability of large gain.
Gambling is categorized in the speculative risks, which offers a chance to make money, lose
money or walk away even.