Grade

12

SUBJECT AREA
QUARTER 2 – MODULE 2

INVESTMENT
RISK

1
Grade

12
Self-Learning Module in BUSINESS FINANCE
Measure and list ways to minimize or reduce investment risks
Lesson:
in simple case problems..
Quarter: 2 Week: 2 Day and Time: See Class program

Learning competency:
• Measure and list ways to minimize or reduce investment risks in simple exercises.

Learning Tasks:
Study Notebook Activity Sheet
✓ Pre-Test, pp.1-2 ✓ Activity 1-3 pp.6-8
✓ Developmental Activities pp.4-5
✓ Post-test p.5

I. INTRODUCTION
At the end of this lesson, the learners will be able to:
• Measure the risk of different types of investments
• Identify ways on how to reduce investment risk and define how risk is
lessened

II. PRE-TEST

Directions: Choose the letter corresponding to the correct answer for each of
the questions provided below.

1. Which statement BEST described rate of return?

a. How fast your money will double in value.
b. How much money you lost in an investment.
c. How much an investment gains or loses value over a period of time.
d. How much the bank charges you interest when you take out loan.
2. What is the basic rule of a risk-to-return relationship?
a. Higher the risk, the lower the return rate
b. Two are not related
c. Higher the risk, the higher the return rate
d. Lower the risk, the higher the return rate
3. The time value or money concept can best be demonstrated using which of the
following?
a. Invest early c. Higher the risk, higher the return
b. Pay yourself first d. Buy low, sell high
4. The probability of an adverse outcome is the definition of _______?

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 a. Statistic b. Risk c. Random d. Variance
5. An investor invests in assets known as a __________?
a. Portfolio c. Securities
b. Block of Assets d. All of the above

III. A. DISCUSSION OF CONCEPTS

Lesson 1: Concept of risk and return

• Investments follow a high-risk, high-return principle.

• Stocks are volatile and that they can lose significantly from their investments
especially if their investment timeframe is short.
• If the stock investments of a good company are invested over a much longer period
of time however, stock investments can be financially rewarding as shown in the PSEi
returns.
• The value of a bank investment on the other hand, follows a relatively straight
upward line, but only gives low returns due to the low risk taken by the investor.

“Risk is the chance that an investment’s actual return will be different than expected. Risk
includes the possibility of losing some or all of the original investment.”
Systematic and Non-Systematic Risk

Risk Definition Also Known As Examples Measurement

Systematic Uncertainty Market risk, Changes in interest Beta (β)
inherent to the undiversifiable rates, recession, wars
entire market risk
Non-systematic Uncertainty that Specific risk, Rumors of a potential Standard
comes with the diversifiable default, labor strikes, deviation
company or risk, residual landslide in a mining (σ) less beta
industry risk company that disrupted
the operations

Measurement Risk it Definition Formula

Measures

Beta (β) Systematic risk • Measure of the

systematic risk of an
investment or portfolio
vs. the market as a
whole.
• Tendency of an
investment's returns to
respond to swings in
the market.

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Standard deviation (σ) Total risk • Sum of systematic
and non- systematic
risk.
• Total volatility
of an
investment.

Note: Guide on β interpretation below:

• =1 – investment’s price will have the same volatility as the PSEi
• >1 – investment’s price will be more volatile than the PSEi
• <1 – investment’s price will be less volatile than the PSEi

Example: A company with a β of 1.3 means that if the PSEi goes up by 10%, this company’s
stock price, on the average, will go up by 13%. The reverse is true which means that if the
PSEi goes down by 10%, this company’s stock price, on the average, will go down by 13%.

Based on the example, it is illustrated that a company with higher beta is more volatile
and a company with lower beta is less volatile. β computed using the formula given on the
table may not be reliable if data points used are for a short period of time only. Using data
covering five to ten years is suggested because such period will often cover the booms and
busts of an economic cycle.
The formula for beta is the covariance of the investment asset’s returns with the
returns of the market divided by the variance of the market. Beta can be easily computed
through Microsoft Office Excel but due to the complexity of the formula in terms of
manually computing beta, sources will be cited instead on where beta can be found.
Getting an estimate of the non-systematic risk, the total risk will be computed first
then from this, the systematic risk will be deducted.
Components of the σ formula:
xi – return
x̄ – average of returns
n – no. of data points

Note that formula for return should be: stock price current divided by stock price previous
less 1.
n-1 is used as divisor because only a sample of data is used.
Total risk can be broken down to systematic and non-systematic risk, the breakdown
formula is beyond the scope or coverage of this course.

To minimize investment risk, an investor has to have a diversified portfolio. The

composition of the portfolio depends on the risk appetite of the investor. A more conservative
investor (i.e. investor who has less appetite for risk) may have a portfolio which is more
skewed to fixed income instruments like time deposits. On the other hand, an investor who
has a higher appetite for risk (i.e. an investor who is more willing to take risk) may have a
portfolio which is more skewed to equity investments.

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Diversification
Diversification is a risk management technique that combines a wide variety of
investments within a portfolio to reduce risk. A well- diversified portfolio can eliminate non-
systematic risk.
Examples of how a more diversified portfolio can reduce the standard deviation of the
portfolio:

Two-Stock PHP 10,000 Portfolio (JFC and DMC)

Year Stock Price
Return xi mean x̄ (xi -x̄)2
30/1/2014 10,000.00
28/2/2014 11,427.60 14.30% 2.90% 1.30%
31/3/2014 11,477.74 0.40% 2.90% 0.10%
30/4/2014 11,661.04 1.60% 2.90% 0.00%
30/5/2014 11,848.70 1.60% 2.90% 0.00%
30/6/2014 11,976.59 1.10% 2.90% 0.00%
31/7/2014 11,923.45 -0.40% 2.90% 0.10%
29/8/2014 12,609.95 5.80% 2.90% 0.10%
30/9/2014 13,048.32 3.50% 2.90% 0.00%
31/10/2014 13,219.55 1.30% 2.90% 0.00%
28/11/2014 13,623.45 3.10% 2.90% 0.00%
29/12/2014 13,635.51 0.10% 2.90% 0.10%
1.70%
σ 4.2%

Five-Stock PHP 10,000 Portfolio (JFC, GLO, URC, DMC, and PCOR)
Stock
Year (xi-x̄)2
Price Return xi mean x̄
30/1/2014 10,000.00
28/2/2014 10,921.56 9.2% 2.9% 0.4%
31/3/2014 10,647.87 -2.5% 2.9% 0.3%
30/4/2014 10,859.22 2.0% 2.9% 0.0%
30/5/2014 10,981.69 1.1% 2.9% 0.0%
30/6/2014 11,122.52 1.3% 2.9% 0.0%
31/7/2014 11,337.00 1.9% 2.9% 0.0%
29/8/2014 11,593.20 2.3% 2.9% 0.0%
30/9/2014 12,009.73 3.6% 2.9% 0.0%
31/10/2014 12,139.22 1.1% 2.9% 0.0%
28/11/2014 12,428.98 2.4% 2.9% 0.0%
29/12/2014 12,356.12 -0.6% 2.9% 0.1%
0.9%
σ 3.1%

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III. B. DEVELOPMENTAL ACTIVITIES
Activity 1 - Directions: Write TRUE if the statement is correct or FALSE if the statement is
incorrect.
1. The risk premium is a function of sales volatility, financial leverage, and inflation.
2. An investor should expect to receive higher returns from taking on lower risks.
3. Diversification with foreign securities can help reduce portfolio risk.
4. Risk is defined as the uncertainty of future outcomes.
5. Increasing the correlation among assets in a portfolio results in an increase in the
standard deviation of the portfolio.

IV. POST-TEST

Activity I - Directions: Given the following stocks (equity investments).

Compute the xi and x̄, AVERAGE for (xi-x̄)2, and σ:

Stock
Year
Price Return xi mean x̄ (xi -x̄)2
30/1/2014 152
28/2/2014 171
31/3/2014 171
30/4/2014 172
30/5/2014 179.1
30/6/2014 176
31/7/2014 176.8
29/8/2014 180
30/9/2014 196
31/10/2014 196
28/11/2014 207
29/12/2014 215

Answer key:
29/12/2014
28/11/2014
31/10/2014
30/9/2014
29/8/2014
31/7/2014
30/6/2014
30/5/2014
30/4/2014
31/3/2014
28/2/2014
30/1/2014

5. T A 5.
4. T B 4.
3. T A 3.
n

2. F C 2.
215
207
196
196
180
176.8
176
179.1
172
171
171
152
Price Return xi mean x̄

1. F C 1.
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Activity
Developmental Pre-test
12.5%
-1.7%
3.9%
5.6%
0.0%
8.9%
1.8%
0.5%

4.1%
0.6%
0.0%
V

3.3%
3.3%
3.3%
3.3%
3.3%
3.3%
3.3%
3.3%
3.3%
3.3%
3.3%
σ

(xi -x̄)2
0.0016

0.10%
0.10%
0.30%

0.10%

0.10%
0.10%
1.6%

0.8%
0.04
4%

0%

0%

0%
0%

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REFERENCES

Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore. Civil
Teaching Guide for Senior High School, Business Finance, Published by the Commission on
Higher Education, 2016

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 WORKSHEET
Name:
Subject: BUSINESS FINANCE
Grade/Section:
Subj. Teacher: Week:

I. FORMATIVE ASSESSMENT

Test/Activity Score
A. Pre-Test PP.1-2
B. Developmental Activity
pp.4-5
C. Post Test p.5

II. SUMMATIVE ASSESSMENT

Activity 1: Directions: Choose the letter corresponding to the correct answer for each of the
questions provided below.

___ 1. Which of the following is a measure of risk?

a. Correlation c. expected return
b. Covariance d. Standard deviation
___ 2. In an investment policy statement, the objectives of an investor are expressed in terms
of ______________________?
a. Risk b. return c. liquidity d. risk and return
___ 3. Which of the following would be an example of systematic risk?
a. Management decisions c. Changes in interest rate
b. Stability of sales d. The amount of debt financing
___ 4. A direct investment occurs when an investor_______________.
a. Buys shares of stocks or bonds.
b. Deposits funds in a bank or buys derivatives.
c. Buys shares of stocks, bonds or mutual funds.
d. Buys shares of stocks or options and future.
___ 5. The following is NOT a reason for investing.
a. To fund higher levels of current consumption.
b. To fund higher levels of future consumption.
c. To fund children education needs.
d. To provide for retirement.
___ 6. Which of the following is NOT a way to make money off the stock market?
a. Buy stock when the cost is low, and sell it when it is high
b. Buy stock, and sell at the same price.
c. Buy stock that pays out a dividend
d. All of the above.

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___ 7. A stock portfolio is ___________?
a. A group of stocks that you can purchase at one time on a stock exchange.
b. A list of all the stocks you own.
c. The online tool used to track stock prices.
d. The document that you receive for purchasing stock.
___ 8. Diversifying can occur by _________?
a. Buying similar stocks and bonds in the same industries.
b. Buying different stocks and bonds in different industries.
c. Buying similar stocks and bonds in different industries.
d. Buying different stocks and bonds in the same industries.
___ 9. Beta is a measure of ___________?
a. A measure of how far a stock moves relative to its mean.
b. A measure the correlation in price moves of any two stocks.
c. A stock volatility in relation to the market.
d. How stock has performed in comparison to a benchmark index.
___ 10. Which of the following describes an index measure of systematic risk?
a. Variance c. Beta
b. Standard deviation d. Coefficient of variation

Activity 2: Directions: Given the following stocks (equity investments). Compute the xi, x̄,
(xi-x̄)2, and σ:

Year Stock Price Return xi mean x̄ (xi-x̄)2

30/1/2014 524
28/2/2014 575.5
31/3/2014 578
30/4/2014 624
30/5/2014 618
30/6/2014 647.5
31/7/2014 658
29/8/2014 700.5
30/9/2014 740
31/10/2014 690
28/11/2014 694
29/12/2014 694

Activity 3: Reflective Assessments

Direction: On a separate sheet of paper, answer the following questions: (5 points each)
1. What concepts or skills did you learn well?

2. What concepts or skills was difficult to understand?

3. What activities did you enjoy the most?

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4. What activity was hard to execute?
5. Did you ask help from your teacher? (Yes or No). If Yes, did you immediately
receive the needed assistance? Was the given assistance helpful for you to understand
better the lessons?

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