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Difficulty: MediumDefinition and Types of Risk

When a business owner opens a new retail store, both the possibility of the business failing due to changing consumer trends and the possibility of the store's inventory being destroyed by a hurricane are classified as pure risks, since both scenarios would result in a financial loss to the owner.

Answer: Answer

Answer

False
The statement is false because it incorrectly categorizes a speculative risk (business failure due to market trends, which includes a chance of profit) as a pure risk. Only the hurricane exposure is a true pure risk.

Step-by-Step Solution

1
Analyze the first scenario: the possibility of the business failing due to changing consumer trends.
This scenario involves the chance of loss, no loss, or profit (if trends are favorable), which defines a speculative risk.
To classify the first risk type based on the outcomes available.
2
Analyze the second scenario: the possibility of the store's inventory being destroyed by a hurricane.
This scenario involves only the chance of loss or no loss (no possibility of profit), which defines a pure risk.
To classify the second risk type based on the outcomes available.
3
Compare the classifications to the statement's claim that both are pure risks.
The claim is incorrect because only one of the two scenarios is a pure risk.
To determine the final truth value of the statement.

Key Concept

Distinction between Pure Risk and Speculative Risk
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Topics

Definition and Types of Risk

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