South Carolina Life and Health Practice Exam

What is risk avoidance in terms of investment strategy?

1. Investing in low-risk bonds

2. Never purchasing stocks to eliminate losing money

3. Using options to hedge investments

4. Diversifying investment portfolios

The correct answer is: Never purchasing stocks to eliminate losing money

Risk avoidance is a strategy that involves eliminating exposure to risk in order to protect assets and investments. In this context, never purchasing stocks is a clear illustration of risk avoidance because it directly avoids the risks associated with equity investments, such as market volatility and the potential for losses. By choosing not to invest in stocks at all, an investor shields themselves from potential downturns and fluctuations in the share prices, hence safeguarding their capital. In contrast, options such as investing in low-risk bonds, using options to hedge, or diversifying portfolios are approaches that manage or mitigate risk rather than completely avoid it. Low-risk bonds still involve some level of risk, albeit lower compared to stocks. Hedging with options involves taking on additional strategies to counteract potential losses, while diversification aims to spread risk across different investments but does not eliminate exposure to risk entirely. Therefore, the emphasis of risk avoidance is clearly exemplified by the decision to never invest in stocks.