Which term describes the risk-management approach of avoiding the risk of investment loss by not purchasing stocks?

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

Answer: (A)

Risk avoidance is the idea of eliminating the risk by not engaging in the activity that creates it. By choosing not to purchase stocks, you remove exposure to stock-market losses entirely, so there’s nothing to lose from that investment. In contrast, risk transfer would mean shifting the risk to someone else or a different vehicle (like hedging or insurance-type instruments), which isn’t what happens when you simply avoid the investment. Risk reduction involves actions that lessen the risk but still leave some exposure, so you’d still face potential losses. Risk retention means you accept the risk and are prepared to bear losses if they occur, which also isn’t the case when you opt out of buying stocks.