Two 9-year-old boys are watching a television replayof a boxing match between Muhammad Ali and JoeFrazier on a program called "Great Fights of the Century."Since the fight took place before they were old enoughto remember the outcome, neither knows who won andthey bet on the outcome. Tom bets on Ali and Tim betson Frazier. Does risk exist in this situation? For Tim? ForTom?



Yes. There is risk of speculation/ speculative risk. In Tim or Tom’s bet, either onewould win and the other losses. There are both chances of loss and gain.Tim and Tom took the bet in the first place hoping for the chance of winning. With this intention, their behavior classifies them as speculators in Finance.

Explanation:

Risk is simply defined as the possibility of loss. It is the possiblity that a loss might occur and the uncertainty about whether the loss will occur There are two main types of risk which are pure and speculative risk.

Speculative Risk can be defined simply as that type of risk that occurs as results in an uncertain degree of gain or loss. They are made as conscious choices and are not just a result of uncontrollable circumstances.

Insurance usually do not protect individuals against losses arising out of speculative risk because these risks are undertaken voluntarily. Example is betting at the race track and investing in the stock markets, Almost all types of investments, gambling.

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