Question

An investor is speculating on the decline in the value of a security and purchases put options on the stock. The news ends up being positive and it results in a rise in the value of the security and the subsequent loss of the entire investment in the put options. This loss is an example of:

Answer 1

Capital risk.

Step-by-step explanation:

Capital risk is defined as the potential to loose all or part of investment. This occurs with investments that do not give a guarantee of return of capital that is invested. The following investment options are prone to capital risk: shares, non government bonds, real estate, and other alternative assets.

The investor in this instance who purchased a put option and ended up losing the entire investment has lost as a result of capital risk.