Question

Which of the following is NOT an example of a non-diversifiable pure risk?

A worker’s risk of losing her income because she is laid off from her job.

A homeowner’s risk of his home being destroyed in a civil war.

A homeowner’s risk of her home being destroyed by a flood during a hurricane.

In fact, all the above are examples of non-diversifiable pure risk.

Answer 1

These are all pure risks which are non-diversifiable. Pure risks cannot be controlled and they have two possible outcomes - loss or no loss. These are beyond human control.

The risk of a worker losing her income because she is laid off from her job is specific to the worker and cannot be diversified away. It cannot be controlled by her and it either results in a loss if the worker is laid off or no loss if she is not laid off.

The risk of a homeowner's home getting destroyed because of a civil war is specific to the homeowner and cannot be diversified away. It cannot be controlled and it either results in a loss if his home is destroyed or no loss if his home is not destroyed.

The risk of a homeowner's home getting destroyed because of a flood is specific to the homeowner and cannot be diversified away. It cannot be controlled and it either results in a loss if her home is destroyed or no loss if her home is not destroyed.

Hence is answer is Option D All the above are examples of non-diversifiable pure risk.