Which term describes the risk-management approach of avoiding risk by not participating in an activity such as investing in stocks?

• A. Risk retention
• B. Risk transfer
• C. Risk avoidance
• D. Risk reduction

Answer: (C)

Risk avoidance means choosing not to engage in the activity that creates the risk, thereby eliminating exposure to it. By opting not to invest in stocks, you remove the market risk entirely—there's no stock investment to lose money on, so the potential for loss is avoided. This is the most complete way to prevent a loss, though it also means you forgo any potential gains from that activity. Other strategies have different roles: reducing risk lowers either the chance or the severity of a loss but doesn’t eliminate it; transferring risk shifts the potential loss to another party (like insurance or hedging); retaining risk means you’re willing to bear the loss yourself. In this scenario, avoiding stock investment aligns with risk avoidance.