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Speculative Risk

Reviewed by Sujaini | Updated on Oct 05, 2020

Catalogue

What is a Speculative Risk?

Speculative risk is a risk category, which results in an uncertain degree of gain or loss when undertaken. All theoretical risks are made as deliberate decisions and are not merely the product of uncontrollable circumstances. The speculative risk is the contrast of pure risk (the possibility of a failure only and no gain potential) because there is some chance of a gain or a loss.

Nearly all investment practices entail such speculative risks because an investor has no idea of whether an investment is going to be a dazzling success or a complete disaster. Some assets, such as contract options, bear a mix of investment risk and risk you can hedge.

Analysing Speculative Risk

Some investments are speculative in comparison with others. Investing in government bonds, for example, has much less investment risk than investing in junk bonds as government bonds have far smaller default risk. In many cases, the higher the speculative risk, the higher the profit or return potential on the investment.

A speculative risk has the potential to cause a loss or gain. It requires input from the person who is looking to take the risk and is, therefore, voluntary. At the same time, it is hard to anticipate the result of speculative risk, since the precise amount of gain or loss is unknown.

Alternatively, different factors, such as company history and market trends when buying stocks, are used to estimate gain or loss potential.

Speculative Risk As Opposed to Pure Risk

Pure risk includes circumstances where the only outcome is a failure, as opposed to the theoretical risk. Typically speaking, these kinds of threats are not taken on knowingly and are out of investor control instead.

Pure risk is most widely used in assurance required assessment. For example, in an accident, if a vehicle is damaged, there's no possibility that the outcome will be a benefit. Since the result of the event can only lead to a loss, it's a pure risk.

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