Which statement about the risk involved in George's inheritance options is true?

Which statement about the risk involved in George's inheritance options is true?

• A. Purchasing T-bills is a pure risk because the interest rate payable is known, and the chance of loss is minimal.
• B. Donating his inheritance to charity is a pure risk; there is no uncertainty that the money will be gone and George will have no chance of profit.
• C. Buying a boat is a nondiversifiable risk because George can only afford to purchase a single yacht.
• D. The rental property presents both pure and speculative risk; property values may increase, and the building could burn down.

Answer: (D)

Real estate investments can carry more than one type of risk at once. Pure risk is the chance of loss or no loss with no opportunity for gain, while speculative risk involves the possibility of both gain and loss. A rental property fits both: there’s a potential for property values to increase (speculative risk, with the possibility of profit) and a real chance of loss from events like a fire or other property damage (pure risk, since outcomes include loss or no loss). Insurance can transfer much of the pure risk, while diversification and market analysis affect the speculative side. This combination is why the rental property option accurately reflects both pure and speculative risk.

Real estate investments can carry more than one type of risk at once. Pure risk is the chance of loss or no loss with no opportunity for gain, while speculative risk involves the possibility of both gain and loss. A rental property fits both: there’s a potential for property values to increase (speculative risk, with the possibility of profit) and a real chance of loss from events like a fire or other property damage (pure risk, since outcomes include loss or no loss). Insurance can transfer much of the pure risk, while diversification and market analysis affect the speculative side. This combination is why the rental property option accurately reflects both pure and speculative risk.