SENIOR HIGH SCHOOL

BUSINESS FINANCE
Quarter 4 – Module 2:
Introduction to Investment

REGION VI – WESTERN VISAYAS

Business Finance – Grade 12
Alternative Delivery Mode
Quarter 4 – Module 2: Introduction to Investment
First Edition, 2021

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Development Team of the Module

Writer: Louell E. Bodios, Maricris C. Cancino and Mara Ellyn H. Lacson
Editor/Reviewer: Ma. Teresa F. Mijares
Layout Artist: Louell E. Bodios
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Ma
Marsette D. Sabbaluca, CESO VI
Lynee A. Peňaflor, PhD., ASDS
Ly
Salvacion J. Senayo, OIC-ASDS
Sa
Zaldy H. Reliquias, PhD., Chief-CID
Raulito D. Dinaga, EPS-LRMS
Ra
Ma. Teresa F. Mijares, EPS-Math
Othelo M. Beating, PDO-II-LRMS

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Ramir B. Uytico, Ed.D, CESO IV, Regional Director
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Rhodalyn G. Delcano-EPS-Math

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 SENIOR HIGH SCHOOL

BUSINESS FINANCE
Quarter 4 – Module 2:
Introduction to Investment
Introductory Message
For the facilitator:

Welcome to the Business Finance Alternative Delivery Mode (ADM) Module on Introduction
to Investment!

This module was collaboratively designed, developed and reviewed by educators both from
public institutions to assist you, the teacher or facilitator in helping the learners meet the
standards set by the K to 12 Curriculum while overcoming their personal, social, and economic
constraints in schooling.

This learning resource hopes to engage the learners into guided and independent learning
activities at their own pace and time. Furthermore, this also aims to help learners acquire the
needed 21st century skills while taking into consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of the module:

Notes to the Teacher

This contains helpful tips or strategies that will
help you in guiding the learners.

As a facilitator, you are expected to orient the learners on how to use this module. You also
need to keep track of the learners' progress while allowing them to manage their own learning.
Furthermore, you are expected to encourage and assist the learners as they do the tasks
included in the module.
For the learner:

Welcome to the Business Finance Alternative Delivery Mode (ADM) Module on Introduction
to Investment!

This module was designed to provide you with fun and meaningful opportunities for guided
and independent learning at your own pace and time. You will be enabled to process the
contents of the learning resource while being an active learner.

This module has the following parts and corresponding icons:

This will give you an idea of the skills or

What I Need to Know
competencies you are expected to learn in the
module.
This part includes an activity that aims to check
What I Know what you already know about the lesson to take. If
you get all the answers correct (100%), you may
decide to skip this module.
This is a brief drill or review to help you link the
What’s In
current lesson with the previous one.

In this portion, the new lesson will be introduced to

What’s New
you in various ways; a story, a song, a poem, a
problem opener, an activity or a situation.
This section provides a brief discussion of the
What Is It
lesson. This aims to help you discover and
understand new concepts and skills.
This comprises activities for independent practice
What’s More to solidify your understanding and skills of the
topic. You may check the answers to the exercises
using the Answer Key at the end of the module.
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What I Have Learned
sentence/paragraph to be filled in to process what
you learned from the lesson.
This section provides an activity which will help
What Can I Do
you transfer your new knowledge or skill into real
life situations or concerns.
This is a task which aims to evaluate your level of
Assessment
mastery in achieving the learning competency.

In this portion, another activity will be given to you

Additional Activities
to enrich your knowledge or skill of the lesson
learned.

Answer Key This contains answers to all activities in the

module.
At the end of this module you will also find:

References This is a list of all sources used in developing this

module.

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1. Use the module with care. Do not put unnecessary mark/s on any part of the module.
Use a separate sheet of paper in performing the exercises.
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in the module.
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If you encounter any difficulty in answering the tasks in this module, do not hesitate to
consult your teacher or facilitator. Always bear in mind that you are not alone.
We hope that through this material, you will experience meaningful learning and gain deep
understanding of the relevant competencies. You can do it!
 What I Need to Know

This module was designed and written with you in mind. It is here to help you the about the
basic concepts of the definition, purpose, kinds, advantages and disadvantages and the risks
of investment. The scope of this module permits it to be used in many different learning
situations. The language used recognizes the diverse vocabulary level of students. The
lessons are arranged to follow the standard sequence of the course. But the order in which
you read them can be changed to correspond with the textbook you are now using.

The module has only one lesson, namely:

• Lesson 12 - Explaining the risks inherent in each type of investment

After going through this module, you are expected to:

1. Measure and list ways to minimize or reduce investment risks in simple case problems
(ABM_BF12-IVm-n-25)
 What I Know

True/False: The following True or False questions are for you to answer. Write T if the
statement is Correct. And F if otherwise. Use a separate answer sheet.

1. Asset allocation is the process of allocating money across financial assets, such as
stocks, bonds, and mutual funds, with the objective of eliminating risk altogether.
2. In constructing a portfolio, you should diversify across several investments.
3. A portfolio can be less risky when its investments move in perfect tandem.
4. Diversifying your investments could protect you to some degree from the problems
associated with misleading financial statements from some companies.
5. One way to reduce your diversification costs is to invest in various mutual funds.
6. In general, the larger the proportion of your portfolio that is allocated to bonds, the
lower will be your portfolio's overall risk.
7. As you allocate more of your investment portfolio to bonds, you reduce your exposure
to interest rate risk, but increase your exposure to market risk.
8. The first step in applying asset allocation to your personal financial plan is to ensure
adequate liquidity
9. In order to add real estate to your investment portfolio, you may buy houses or other
real estate directly or you may purchase real estate investment trusts
10. The total risk = systematic + nonsystematic risk

Lesson
Explaining the Risks Inherent in
1 Each Type of Investment

This module will help you will learn how to explain risks of investing. This aims to acquaint
you in measuring and listing ways to minimize investment risks. So, ready your working space
and make this lesson more meaningful. Let us begin!
 What’s In

Study the following case and answer the next questions.

Case Study
Nathan is 26 years old and is working at his first job out of college. His major expenses are
rent for an apartment he shares with his roommate Mike and student loans. He drives an older
car that is paid off. He has little money saved for emergencies and would like to travel
someday. He became eligible to participate in his company’s 401(k) retirement plan January
1, 2003.

Life Stage: Young single adult Goals: Emergency fund, car, travel

Suggestions:
Nathan could deposit money each payday into an interest-bearing savings account at the bank
or credit union. To remove the temptation to spend it before he gets to the bank, he should
consider automatic payroll deduction.
.
What are your other suggestions where do Nathan put his investment?

What’s New

Observe how the your’ savings (i.e. PHP10,000) could have changed value over time if placed
in a bank time deposit and an equity investment.
Bank (Time Deposit)

Table 1: Sample Performance of PHP 10,000 in Time Deposit

Stocks/Equities (Philippine Stock Exchange Index “PSEi”)

Table 2: Sample Performance of PHP 10,000 in Stocks/Equities

1. Whom do you choose to invest?
2. If there is a way to measure the risk, will it help you decide whether to place their
money in an investment or not?

What Is It
?

Investments follow a high-risk, high-return principle. In our previous activity stocks are volatile
and that you can lose significantly from your investments especially if your investment
timeframe is short. If the stock investment of a good company is 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 (CAGR of 3.4% for the period 2004-2014) 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.”
There are other ways of measuring risk but focus will be on standard deviation and beta.
Systematic risk is no diversifiable while non-systematic risk is diversifiable.
The total variability in returns of a security represents the total risk of that security. Systematic
risk and unsystematic risk are the two components of total risk. Thus,

Total risk = Systematic Risk + Unsystematic Risk

SYSTEMATIC RISK

• The portion of the variability of return of a security that is caused by external factors,
is called systematic risk.
• It is also known as market risk or non-diversifiable risk.
• Economic and political instability, economic recession, macro policy of the
government, etc. affect the price of all shares systematically. Thus the variation of
return in shares, which is caused by these factors, is called systematic risk.

Systematic risk can be grouped in to…

• Market risk: it refers to stock variability due to changes in investor’s attitudes and
expectations. These are on real and psychological basis. It includes political, social
and economic reasons.
• Interest rate risk: when price of securities rises or fall due to changes in interest rates.
security prices move inversely to interest rates. This risk affects bond holders more
directly than equity investors.
• Purchasing power risk: this is also known as inflation risk. With the rise in inflation,
there is reduction in purchasing power and affects all the securities. This is directly
related to interest rate risk. Interest rate increases with the increase in inflation.

NON - SYSTEMATIC RISK:

• The return from a security sometimes varies because of certain factors affecting only
the company issuing such security. Examples are raw material scarcity, Labour strike,
management efficiency etc.
• When variability of returns occurs because of such firm-specific factors, it is known as
unsystematic risk.

Non-systematic risk is divided in to…

• Business Risk: it includes business cycle, demographic factors, political policies for
industries
• Financial risk: it basically includes risk due to capital structure of companies.

Measuring Systematic Risk

To be compensated for risk, the risk has to be special.

• Unsystematic risk is not special.

• Systematic risk is special.

The Beta coefficient () measures the relative systematic risk of an asset.

• Assets with Betas larger than 1.0 have more systematic risk than average.
• Assets with Betas smaller than 1.0 have less systematic risk than average.

Because assets with larger betas have greater systematic risks, they will have greater
expected returns.
Measurement of Risk
 Risk refers to dispersion of a variable.

 It is measured by variance or SD.

 Variance is the sum of squares of the deviations of actual returns from average returns

 Variance = Σ (Ri – R)2

 variance = (SD) 2

Risk also refers to the possibility that the expected return may not materialize. There may be
loss of capital, i.e. investment has to be sold for an amount less than paid for it. There may be
no income from investment or the income may be less than the expected. The natural query
is “Why the investors go for risky investment”? The answer is that the desire for higher return
entices them to go for risky investments. Investment decision should be taken after
considering both return and risk. How to measure the risk? Standard deviation of various
possible rates of return is used to measure the risk? Larger the standard deviation, greater
the risk, and vice versa. How to take investment decisions when various opportunities are
there? Here two sets of 3 total rules provide help to us.
These rules are:
SET A:
a. If expected returns from various securities are different but their standard deviations
are same: Decision should be taken on the basis of expected returns. Security with
higher expected return is preferred.
2. If expected returns from various securities are same but their standard deviations are
different: Decision should be taken on the basis of standard deviations. Security with
lower standard deviation should be preferred.

SET B:
3. If expected returns as well as standard deviations from various securities are different,
decision should be taken on the basis of coefficient of variation. Coefficient of variation
is obtained by dividing standard deviation by expected return. Coefficient of variation
defines risk as standard deviation per peso of expected return. Security with lower
coefficient of variation is preferred.

Example: Following is the data regarding six securities:

Which of the securities will be selected?

Solution:
1. A, B and F have same return. A’s SD is lowest. Hence, B and F should be dropped.
Now we are left with A, C, D and E.
2. A and D have same SD. D’s return is lower. Hence D should be dropped. Now we are
left with A, C and E.
 3.

The following securities may be selected in the order of:

(i) A (ii) E and (iii) C

Calculation of Mean Return:

Calculation of mean return can be explained with the help of following two examples:
a) Find the mean return of the shares of particular company over 5 years:

Answer: Let the return of the share = X

Mean = ∑X/n = 89/ 5 = 17.80

b) Find the mean return of the shares of a company:

CALCULATION OF STANDARD DEVIATION

Standard Deviation measures the variation in the values of the variable. In financial
management, it is used as the measurement of the risk. The absolute values of the S.

Variance is also a measurement of risk. Variance is (𝐒𝐃𝟐 ). The absolute values of the
Variances do not convey any meaning. When used for comparison purpose, variances give
the same result as is given by SDs
Calculation of Standard deviations can be explained with the help of following two examples:
Example (a)
Find the SD of the rate of returns of the shares of particular company over five years:
Answer: Let the rate of return (%) = X

Example (b)
Find the SD of the rate of returns on the shares of particular co.:

Answer: Let the rate of return (%) = X

CALCULATION OF BETA

Beta is an indicator of an investment’s systematic risk. It represents systematic risk associated

with an investment in relation to total risk associated with market portfolio. This beta measures
the riskiness of individual security relative to market portfolio. It is a ratio of “its covariance with
the market” to “the variance of market as a whole”. A security with beta greater than one is
called as aggressive security; with beta less than one is called as defensive security and with
beta equal to one is called as neutral security.

Covariance between returns from market

Portfolio and those from particular security
Beta = -------------------------------------------------------------
Variance of market portfolio

Covariance It is a statistical measurement that measures the combined variation (co-vary)

between two variables; (that is, more or less when one of them is above its mean value, then
the other variable tends to be above its mean value too, then the covariance between the two
variables will be positive. On the other hand, if one of them is above its mean value and the
other variable tends to be below its mean value, then the covariance between the two variables
will be negative). In the Financial Management, it is used to measure the co-movements
between return from ‘market’ and that from a particular security or portfolio. The range of
covariance values is unrestricted (unlike the coefficient of correlation which is restricted to ±

1.)

Example (X = return on market portfolio; Y = return on specific security)

Ways to minimize or reduce investment risk

1. Due diligence
It is essential that before any call on investing, research should be carried out. For
example, It is pertinent that before investing in a stock one checks earning growth, PE
ratio, debt load, management team and then compare it with other stocks in the same
industry on key parameters. Stocks with high PE ratios, unstable management and
inconsistent profitability and revenue growth could be eliminated.

2. Capital allocation
Out of the total capital available for investment, assign amounts in different class of
investment such as debt, equity or mix of both depending on growth requirements of
capital. In case an individual starts investment at an early age, then investing in
equities offering higher returns over long duration of investment would mitigate volatility
and inflation risk. On the other hand, debt instruments like bonds have high inflation
risk over time and are susceptible to interest fluctuations.
 3. Portfolio diversification
This entails selection of various investments products, exposure to equity belonging to
different sectors, mix of various options available for instrument. As a strategy, there
could be a possibility of lower returns but would result in alleviating risk of substantial
capital loss.

4. Monitoring portfolio
It is essential at periodic intervals. For instance, at times of lower interest, price of debt
securities moves up and could provide an opportunity for switch in the portfolio. In case
an individual cannot manage the monitoring, it is advisable to shift to Mutual Funds to
protect the capital.
.
5. Blue-chip stocks
In order to ease loss of capital and avoid liquidity risk, it is ideal to stay invested in
bellwether stock or fund. Investors should watch out for credit rating of debt securities
and could invest in better rated securities to avoid default risk.

What’s More

Guide Task:
1. Solve for standard deviation, percentage of return
2. Complete the table above.
 What I Have Learned

Systematic vs. Non-systematic Risk

Systematic Risk Unsystematic Risk
Risk/Threat associated with Hazard associated with
Meaning the Market or the segment specific, security, firm or
as a whole industry.
Large number of securities Restricted to the specific
Impact
in the market company or industry.
Controllability Cannot be controlled Controllable
Diversification of the
Hedging Allocation of assets
portfolio
Financial and Business
Types Interest risk and Market risk
specific risk
Can be avoided or resolved
Avoidance Cannot be avoided
at a quicker pace.
Market risk, undiversifiable Specific risk, diversifiable
Other name
risk risk, residual risk
Rumors of a potential
default labor strikes,
Change in interest rates,
Examples landslide in a mining
recession, wars
company that disrupted the
operations.

Measurement Beta (ß) Standard deviation (σ) less

beta

Measuring Systematic and Non-Systematic Risk

Measurement Risk it Measures Definition Formula

• Measure of the
systematic risk of
an investment or
portfolio vs. the
market as a
Beta (ß) Systematic Risk whole.
• Tendency of an
investment’s
returns to respond
to swings in the
market
• Sum of systematic
and non-
Standard deviation
Total Risk systematic risk
(σ)
• Total volatility of
an investment
 • Standard Deviation measures the total risk (Systematic as well as unsystematic risk)
of an investment.
• Beta represents systematic risk associated with an investment in relation to total risk
associated with market portfolio.
• Covariance is the measure of how much two variables vary together. That is to say,
the covariance becomes more positive for each pair of values which differ from their
mean in the same direction, and becomes more negative with each pair of values
which differ from their mean in opposite directions.

Ways to minimize or reduce investment risk

1. Due diligence
2. Capital allocation
3. Portfolio diversification
4. Monitoring portfolio
5. Blue-chip stocks

What Can I Do

1. Open the link (https://www.youtube.com/watch?v=3qv7E2yIiw4) in your laptop/mobile

phone and answer the following questions.

• Describe investment risk through this video

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
2. Emphasize that volatility can also be an opportunity.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
3. Explain the value of properly understanding the risk of the product they are investing in.
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
 Assessment

Required:
1. Compute the standard deviation (σ) of the
following stocks and the PSEi.
2. Compute for xi and x̄
3. Compute for (xi-x̄)

Additional Activities

Read and answer.

1. “As long as we can’t lose any money, we have a risk-free investment.” Discuss this
comment.
2. Both investing and gambling can be defined as “undertaking risk in order to earn a
profit.” Explain how these two activities are different and why society generally
takes a more favorable view of investing compared to gambling.
 References

Online References:

• http://cbafaculty.org/Personal%20Finance/chapter%2018.pdf. Retrieved on July, 31,

2020
• https://www.scribd.com/document/383586075/Systematic-and-Unsystematic-Risk-
Capital-pdf. Retrieved on July, 31, 2020
• https://www.educba.com/systematic-risk/ Retrieved on July, 31, 2020
• https://www.financialexpress.com/money/smart-investing-five-ways-to-reduce-
investment-risk/1894175/ Retrieved on July, 31, 2020
• https://www.ag.ndsu.edu/money/for-educator-packaged-programs/package-program-
files/basics-saving. Retrieved on July, 31, 2020

Book References:

• Teaching Guide for Senior High School BUSINESS FINANCE – Published by

Commission on Higher Education, 2016 ©, Chairperson: P.B. Licuanan, Ph. D.
• Business Finance for Senior High School, De Guzman, A.A., (2019), Lorimar
Publishing, Inc.

Answer Key

10. T
9. T
8. T
7. F
6. T
5. T
4. T
3. F as well as growth
2. T deposit, or a diversified mutual fund whose goal is safety
in a money market mutual fund or insured certificates of
1. F
Nathan should save money for relatively short term goals

What I Know What’s In

What Can I Do
1.All investments involve some degree of risk. In this video, risk refers to the degree of
uncertainty and/or potential financial loss inherent in an investment decision. In general,
as investment risks rise, investors seek higher returns to compensate themselves for
taking such risks. Every saving and investment product has different risks and returns.
Differences include: how readily investors can get their money when they need it, how fast
their money will grow, and how safe their money will be. In this section, we are going to
talk about a number of risks investors face.
2.It assumes that volatility is necessarily bad. Certainly, it can be unnerving, but it can also
create investment opportunities: at its most simple, the prices of assets fall, which makes
them more attractive. It allows investors to rebalance their portfolios into investments they
may not have considered when prices were higher. In this way, volatility can be a real
advantage when managing a portfolio.
What’s More
What’s New
1. There is no right or wrong answer because the choice of an investor depends not
just on returns but also on his/her risk appetite assets
Additional Activities
1. This is a false comment. You can avoid losing money and still earn less than
expected. Very small rates of return over long periods of time are still “bad”
outcomes and the chance of that happening means you are exposed to risk even
if you can’t lose money.
2. While both activities use risk in an attempt to earn a profit, there are several
important differences. First, the risk-return profile is different. Most forms of
gambling have a negative expected return (the “house edge”). Even games where
you might argue that some people have a positive expected return (sports betting,
poker, etc.), the average individual will lose money due to the fixed cost of paying
the gambling institution offering the wager. On the other hand, investing typically
offers a positive rate of return. While stocks and bonds have both had periods of
negative returns, the long-run rate of return on both is significantly positive.
Assessment
What Can I Do continued…
3. Accepting risk is acknowledging the possibility of losing some or all of the investment
principal. High risk typically means high volatility. When something is high in volatility, it is
unpredictably irresolute. Both timing and degree of fluctuation are difficult to anticipate.
When something is low in volatility its movements are predictable with a high degree of
certainty, it is low risk. Risk is not independent and should not be considered in a vacuum.
Risk generally correlates positively with return. This means that as risk increases, so do
potential returns. Unlike other risks we accept, there is no such thing as investment
insurance to protect against bad investments.
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