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

Speculative risk correctly refers to situations where there is potential for both loss and gain. This kind of risk is inherent in various financial activities, investments, or business ventures where individuals or entities engage in actions that could lead to profit or loss. Unlike pure risk, which involves scenarios that can only result in loss (such as a natural disaster), speculative risk allows for possible positive outcomes alongside negative ones.

For instance, investing in stocks is a speculative risk; an investor could either gain substantial profits if the stock value increases or experience losses if it decreases. Calculated risk, while related, typically focuses on taking strategic actions with known odds of successful outcomes rather than the inherent potential for both enhancement and detriment found in speculative risk. Insurable risk is defined by its probability and the ability to be covered by insurance, which is not the same as having both potential profits and losses.

Thus, understanding speculative risk is crucial in fields like finance and real estate, where decisions often navigate the balance between opportunity and potential downside.