An individual who purchases an apartment building to rent to tenants faces both pure risk and speculative risk. Which one of the following is a pure…

A pure risk is a situation that involves only the chance of loss or no loss, with no possibility of a financial gain. A fire damaging the apartment building is a classic example of a pure risk. If a fire occurs, the owner suffers a financial loss. If no fire occurs, the owner's financial position does not change. Insurance is primarily designed to treat pure risks, as their outcomes are limited to negative or neutral, making them statistically predictable.

The value of the building decreases due to market conditions: This is a speculative risk because the value could also increase, presenting an opportunity for gain.

A new highway is built nearby, increasing property value: This is a speculative risk as it involves a clear chance of financial gain.

The rental income is less than the mortgage payment: This is a business or financial risk, which is speculative because rental income could also exceed payments, resulting in a profit.

The Institutes. (2023). CPCU 500: Foundations of Risk Management and Insurance (3rd ed.). Chapter 1, "Introduction to Risk Management," Section: Types of Risk. The text explicitly defines pure risk as a chance of loss or no loss and contrasts it with speculative risk, which also includes a chance of gain.

Vaughan, E. J., & Vaughan, T. (2013). Fundamentals of Risk and Insurance (11th ed.). Wiley. Chapter 1, "The Problem of Risk," provides a foundational academic definition of pure versus speculative risk, using examples like property damage (pure) and market fluctuations (speculative).