Which of the following is a method of managing risk?

• A. Avoidance
• B. Litigation
• C. Insurance premium
• D. Diversification

Answer: (A)

In risk management, you choose how to handle potential losses from a given exposure. The strongest way to remove risk entirely is avoidance—by not engaging in the activity or situation that could cause the loss, you eliminate the chance of that loss occurring.

Avoidance is the clearest way to prevent a loss because it stops the risk at the source. The other options don’t remove the risk on their own: litigation is a legal remedy after a loss, not a way to prevent it; paying an insurance premium is about transferring risk to an insurer, which shifts the financial burden but doesn’t eliminate the risk itself; diversification spreads risk to reduce potential impact, but it doesn’t remove the possibility of a loss in any single area.