SENIOR HIGH SHOOL

BUSINESS FINANCE
Module 7
(Week 8 & 9)
Capital Budgeting and Risk
Return Trade Off

Image Source 1: Dreamstime entitled “Finance Business Accounting Analysis Management Concept, 2020
Business Finance
Module 7: Capital Budgeting and Risk Return Trade Off

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Development Team of the Module

Developers/Compilers:
DENNIS G. QUITOY – Teacher I, Lahug Night High School

Content Editors:
ROY C. GENARES – Principal I, Sirao Integrated School
JONAH B. BACALSO – Head Teacher VI, Cebu City NSHS

Language Editors:
MARIA FE S. MACUL – MT II/School Head, Buhisan Night HS
JESUSIMA B. JUMALON – Principal I, Punta Princessa Night HS

Reviewer:
MARITES V. PATIÑO, EdD – EPSvr, Mathematics

Management Team:
RHEA MAR A. ANGTUD, EdD
DANILO G. GUDELOSAO, EdD
GRECIA F. BATULANA
MARITES V. PATIÑO, EdD
VANESSA L. HARAYO
– Schools Division Superintendent
– Asst. Schools Division Superintendent
– CID Chief
– EPSvr, Mathematics
– EPSvr, LRMS

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 Senior High School

BUSINESS FINANCE
Module 7
Capital Budgeting and Risk
Return Trade Off
Introductory Message

Welcome to the Business Finance for Senior High School Student on Capital
Budgeting and Risk Return Trade Off

This module was collaboratively designed, developed and reviewed by educators both
from public and private institutions to assist you, the teacher 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.

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 part includes an activity that aims to

check what you already know about the
What I Know lesson to take.
(Pre-Test)

This will give you an idea of the skills or

competencies you are expected to learn in
the module.
What I Need to Know
(Objectives)

This is a brief drill or review to help you

link the current lesson with the previous
one.
What’s In
(Review/Springboard)

In this portion, the new lesson will be

introduced to you in various ways; a
What’s New story, a song, a poem, a problem opener,
(Presentation of the Lesson) an activity or a situation.
This section provides a brief discussion of
the lesson. This aims to help you discover
What is It and understand new concepts and skills.
(Discussion)
 This section provides activities which will
help you transfer your new knowledge or
What’s More skill into real life situations or concerns.
(Application)
This includes key points that you need to
remember.
What I Need To Remember
(Generalization)
This comprises activities for independent
practice to solidify your understanding
What I Can Do and skills of the topic.
(Enrichment Activities)
This is a task which aims to evaluate your
level of mastery in achieving the learning
Assessment competency.
(Post Test)
This contains answers to the following:
● What I Know
● What’s In
Answer Key ● What’s More

At the end of this module you will also find:

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

The following are some reminders in using this module:

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 answering the exercises.
2. Do not forget to answer What I Know before moving on to the other activities
included in the module.
3. Read the instructions carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Submit the accomplished module every end of the week.
7. Upon submission claim the module for the following week.

If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator through text, phone call, chat, online
classroom during the virtual orientation. 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!
About the Module

What is Capital Budgeting and Risk Return Trade Off?

(cited from: Investopedia entitled “Capital Budgeting” by Will Kenton, 2020)

This Module will talk about capital budgeting that evaluates major projects and
investments, such as new plants or equipment. It is the process that involves
analyzing a project’s cash inflows and outflows to determine whether the expected
return meets a set benchmark. There are major methods of capital budgeting
include discounted cash flow, payback, and throughput analyses.

The risk-return tradeoff states that the potential return rises with an increase in
risk. Using this principle, individuals associate low levels of uncertainty with low
potential returns, and high levels of uncertainty or risk with high potential
returns. According to the risk-return tradeoff, invested money can render higher
profits only if the investor will accept a higher possibility of losses (Investopedia,2020).

This module is good for two (2) weeks

● Lesson 1 – Capital Budgeting
● Lesson 2 – Risk Return Trade Off
After going through this module, you are expected to:
• understand capital budgeting and risk return trade off;
• compute for the payback method and net present value and;
• differentiate investment risks and risk tolerance.

What I Know (Pretest)

Multiple Choice
Directions: Select the letter of the best answers to the given items. Write your
answers on a separate sheet of paper.

1. It is a method that evaluates a project by measuring the time (usually

expressed in years.); it will take time to recover the initial investments.
A. internal rate of return C. net present value
B. payback method D. none of the above

2. It is the process that a business use in evaluating and selecting major projects or
investment.
A. capital budgeting C. marketing
B. expenditures D. planning

3. These are competing projects that the approval of one eliminates the others.
A. combined C. mutually exclusive
B. independent D. subdivision

4. These are the net cash inflows one expects to get when the business or project
has already started.
A. cash disbursement C. cash refund
B. cash receipts D. cash returns

5. This refers to the difference between the present value of cash inflows and the
net present value of cash outflows over a period.
A. internal rate of return C. net present value
B. payback method D. none of the above

6. If the net present value is ___________, the project should be rejected.

A. even C. positive
B. negative D. uneven

7. When the cash returns are ________, the payback period is computed by adding
the cash returns until the total is equal to the investment.
A. even C. positive
B. negative D. uneven

8. Which statement is TRUE about risks?

A. Risks are present in all types of investment.
B. An investor can select investments with minimum risks.
C. Both A and B
D. None of the above

9. What kind of investment is said to have higher returns?

A. Average risk C. Low risk
B. High risk D. Risk free

10. Which is TRUE about risk-return trade off?

A. An investor will never accept losses in an investment.
B. It is the concept of low-risk-high-return.
C. The riskier the investment is, the more an investor expects a high return or
profit.
D. All of the above

11. Which of the following describes a conservative type of investor?

A. Does not invest at all.
B. Invests all resources in a time deposit.
C. Invests all resources in the stock market.
D. Invests all resources in the online selling business.

12. What is investment diversification?

A. Investments with low risks.
B. Investments with no risks.
C. Investments with high profit.
D. Investments from different profit-making activities.

13. If the net present value is ___________, the project should be accepted.
A. even C. positive
B. negative D. uneven

14. If the net present value is ___________, the project should be rejected.
A. even C. positive
B. negative D. uneven

15. When the cash returns are ________, the payback period is computed by adding
the cash returns until the total is equal to the investment.
A. even C. positive
B. negative D. uneven

Lesson
Capital Budgeting
1

What I Need to Know

Every businessman should plan and decide where his resources would go and
what would be the benefits of his decision. He may also decide to acquire long-
term investments such as additional units of the plant, property and equipment,
replacement of machine or purchasing fixed assets. All these decisions require
the use of capital budgeting tools and equipment.

At the end of this lesson, you are expected to:

⚫ know that every businessman should plan and decide where his resources would
go and what would be the benefits of his decision;
⚫ learn how to acquire long-term investment such as additional units of the plant,
property and equipment, replacement of machine or purchasing fixed assets; and
⚫ understand that all these decisions require the use of capital budgeting tools and
equipment.

What’s In
Directions: Arrange the following jumbled letters to form the correct word or
phrase based on the given clues. Write your answers on a separate sheet of
paper.
1. It is a method that evaluates a project by measuring the time (usually expressed
in years) it will take to recover the initial investments.
Y P A C K A B T H O D M E

2. These are the net cash inflows one expects to get when the business or project has
already started.

A S H C T R U N E R S

3. This refers to the difference between the present value of cash inflows and the net
present value of cash outflows over a period.
T E N S N E T E R P V U A L E

4. It is defined as the discount rate that makes the net present value of an investment
equal to zero.

N I N A L T E R A T E R F O R T T U N E

What’s New

Capital Budgeting
(cited from: Investopedia entitled “Capital Budgeting” by Will Kenton, 2020)

Capital budgeting is the process a business undertakes to evaluate potential

major projects or investments. Construction of a new plant or a big investment in
an outside venture are examples of projects that would require capital budgeting
before they are approved or rejected.

As part of capital budgeting, a company might assess a prospective project's

lifetime cash inflows and outflows to determine whether the potential returns that
would be generated meet a sufficient target benchmark. The capital budgeting
process is also known as investment appraisal.
Steps in Capital Budgeting

1
Investment 2
Proposal
All levels within Review and 3
the organization Analyze of the
are encouraged to
make suggestions
Proposal Decision-making 4
The financial
for capital The analysis will
expenditures
personnels review
and analyze the
be presented to Implementation 5
decide whether the
benefits and costs After being
proposal will push
that may be approved, the Monitoring
or not. funds will be
derived from the The actual costs
proposal using available and the are recorded,
the financial tools. project will be reported and
operational. compared with
the budgeted
figures. Corrective
measures may be
required if there
are some
deviations.

(Image Source 2: Business Finance Teaching Guide “Finance Business Accounting Analysis Management
Concept, 2020)

What Is It

Terms related to capital budgeting:

1. Exclusive Projects
a. Independent projects do not compete with other projects.
Example: Project Proposal A is for increasing the sales volume of
Product A. Project Proposal B is for the opening of a new outlet in
Mindanao.

b. Mutually exclusive projects compete with other projects and the

approval of one eliminates the other projects.
Example: Project Proposals A and B are presented to increase the sales
volume of the product. If Project Proposal A is accepted, Project B will
be eliminated.

2. Capital Rationing and Unlimited Funds

a. The business with capital rationing will choose a project with the best
opportunities.
b. If the business has unlimited funds, it will accept all the projects that
pass the risk-return criteria.
 3. Cash Returns
These are the net cash inflows one expects to get when the business or
project has already started.

Tools in Capital Budgeting

1. Payback Method
It is a method that evaluates a project by measuring the time (usually expressed
in years), it will take time to recover the initial investments.

Even Cash Flow

Example 1: NEPTUNE Company is considering a project requiring an initial

investment of Php 120,000.00. The project is expected to realize annual cash
returns of Php 25,000.00 for 6 years. Calculate the payback period of the project.

Payback period = Initial Investment / Annual Cash returns

= Php 120,000.00 / Php 25,000.00
= 4.8 years.

In this example, NEPTUNE Company will accept the project because the payback
period is 4.8 years shorter than 6 years.

Uneven Cash Returns

When the cash returns are uneven, the payback period is computed by adding
the cash returns until the total is equal to the investment.

Example 2: NEPTUNE Company is planning to undertake another project with an

initial investment of Php 100,000.00. It is expected to receive a net cash returns of
Php 25,000.00 in Year 1; Php 30,000.00 in Year 2; Php 35,000.00 in Year 3;
Php 40,000.00 in Year 4; and Php 45,000.00 in Year 5.

We already recovered Php

The payback period is 3.25 years (3 + 0.25).
90,000.00 by adding the cash
returns in year 1, 2 and 3. We only
need Php 10,000.00 to reach the
initial investment of
Php100,000.00. So in Year 4, we
only need Php 10,000.00 from the
Php 40,000.00 projected cash
return, which is 0.25 or 25% of
the annual cash return.
 2. Net Present Value (NPV)
This refers to the difference between the present value of cash inflows and the net
present value of cash outflows over a period. It is used in capital budgeting and
investment planning to analyze if the project is profitable or not.

If the NPV is positive, the project or investment should be accepted. If it is

negative, it means that it will result to a loss so it should be rejected.

1
4

Image Source 2: Net Present Value

3. Internal Rate of Return (IRR)

The IRR is the most used technique in capital budgeting. It is defined as the
discount rate that makes the net present value of an investment equal to zero.

Example 4: NEPTUNE Company is evaluating the profitability of Project A. It requires

Php 100,000.00 of funding and after one year, the company is expected to receive
Php 125,000.00. Compute for the internal rate of return.

IRR = Php 25,000.00/Php 100,000. 00 = .25 or 25%

NPV = Php 125, 000/(1+.25) – Php 100,000.00 = 0
 What’s More

Directions: Solve the problem below. Show your solution on a separate sheet of paper.

Two project proposals have been presented to NEWTON Corporation. Project

A requires an initial investment of Php 80,000.00 and the expected annual cash
return is Php 30,000.00 for 4 years. Project B requires an initial investment of Php
60,000.00 and the expected annual cash return is Php 20,000.00 for 5 years.

a. What is the payback period of each project? (4 points)

b. Compute for the net present value of each project if the cost of capital
is 10%. (4 points)
c. Which project should NEWTON Corporation accept? Why? (2 points)
 What I Need to Remember

Points to ponder:
Reflection: In your own words what is your understanding of the Words Capital
Budgeting? Write a basic essay on the separate sheet of paper. Your points will
be based on the rubrics attached.

Image Source 4: What I need to remember

What I can do

Directions: Solve the problem below and answer the questions that follow. Write your
solution and answers on a separate sheet of paper.

Two investment proposals have been made and the following data are given below:

Years Project X Project Y

0 (Php 50,000.00) (Php 75,000.00)
1 Php 15,000.00 Php 24,000.00
2 Php 20,000.00 Php 24,000.00
3 Php 25,000.00 Php 24,000.00
4 Php 30,000.00 Php 24,000.00

1. What is the payback period of each proposal? (4 points)

2. Compute for the net present value of each proposal if the cost of capital is
10%. (4 points)
3. Which project should be accepted? Why? (2 points)
 Lesson
Risk-Return Trade Off
2

What I Need to Know

At the end of the module, you should be able to explain the risk-return trade off.
Specifically, you are going to:
a. define risk, return and risk-return trade off;
b. differentiate investment risks and risk tolerance; and
c. explain the importance of portfolio management.

Risk-Return Trade Off

The risk-return trade off states that the potential return rises with an increase in
risk. Using this principle, individuals associate low levels of uncertainty with low
potential returns, and high levels of uncertainty or risk with high potential
returns. According to the risk-return trade off, invested money can render higher
profits only if the investor will accept a higher possibility of losses (cited from:
Investopedia entitle “Amortization” By James Chen, 2020).

Investing is an efficient and effective way to use personal or business funds. These
funds, to be considered an investment, need to be engaged in profitable activities,
otherwise, it will not be investing but mere expenditure. However, there are certain
questions that one may consider before considering an investment activity.

a. Why is there a need for investment?

b. How much will it cost? How much funds is the investor willing to put into this
investment?
c. How big are the chances of gaining or losing from this investment?
d. How long will the investor make hold of this investment?

Investment can be considered as funds that can either multiply or incur a loss.
These questions will help business owners in deciding and choosing the investment
with the greatest possible return or gain.

Investment risks are uncertainties or chances that the outcomes of investments

are different from what is expected or projected.
Some examples of investment risks are (Ontario Securities Commission, 2019):
1.Market risk is the uncertainty due to economic development or factors that affect
the entire market.
2.Liquidity risk is the chance that an investor is unable to sell an investment due
to change in price. The investor may need to accept a lower selling price.
3.Concentration risk refers to the concentration of loss that can be incurred due
to a lack of diversification.
4.Credit risk is the risk that money invested in a government bond may be
uncollectible.
5.Reinvestment risk refers to the risk of loss from shifting from one investment
to another.
6.Inflation risk is the risk that an investment may not be able to sustain its
purchasing power due to inflation.
7.Horizon risk is the risk that an investment may be stopped or pulled-out due to
unforeseen events (loss of job).
8.Longevity risk is the risk that a person will live too long and may outlive his/her
investment/savings.
9.Foreign investment risks are individual market risks that may affect
investments from different countries.

Image Source 5: Bplans entitled “How to Estimate Realistic Business Startup Costs — 2021 Guide” by: Tim
Berry, 2021

Example: An investor is choosing between acquiring a famous franchise for Php 2.5
million and establishing her own convenience store at Php 1 million. The risks of
acquiring the famous franchise are high because it costs more than establishing a
store from scratch. If each business is under the same condition, a down economy
for example, an investor may lose as much as Php 2.5 million if franchising is chosen.
Investment returns are the expected or projected profits to receive from an
investment.

Image Source 6: Link entitled “Is franchising worth for you?” by: Tim Berry, 2021

Example: Suppose that the chosen investment is a franchise. Upon analysis,

franchising will give the greatest possible return primarily because of the established
market strengths of a well-known business name. Continuous support can also be
provided by the parent company. The weight of handling negative economic impacts
will be well-distributed if not avoided. Promotion, branding, and goodwill are also
basically provided and will no longer be a problem to start with. Therefore, higher
profits are expected, given these advantages.

Image Source 7: IndiaNivesh entitled “Risk vs Return: The tradeoff” by: Mehul Khotari, 2019

Risk-return Trade Off

In this regard, risk and return are directly related to an investment opportunity. In
business, there is a principle that lower risk tends to give lower returns while higher
risk tends to give higher returns. Therefore, in a risk-return trade off, an investment
will yield a higher return only if the investor accepts a higher risk or possibility of
losses (Chen, 2020).
However, not all investors are willing to accept risk the moment it is presented to
them. Investors have different levels of acceptance because it is primarily driven by
the availability of resources while balancing the advantages and disadvantages of
investment opportunities. This level of acceptance is called risk tolerance (Twin,
2020) and is classified into conservative, moderate, and aggressive.

Conservative Risk Tolerance is a characteristic of an investor whose willingness

in accepting risks is very low. This investor will expect to gain profit, with little to no
disadvantage to them.

Moderate Risk Tolerance is a characteristic of an investor who is willing to put

average resources and accept some risks. This investor will expect to gain above
average profit, while enduring little disadvantages. This type of investor is more likely
to pull-out an investment (if applicable) whenever risks are uncontrollable.

Aggressive Risk Tolerance is a characteristic of an investor who is willing to put

more resources and accept maximum risks on high-quality investment with high
expectation of return. This investor has great knowledge about the industry and is
willing to keep the investment at a longer holding period until investments create the
highest possible return but is prepared for the worst - losing the entire investment.

Portfolio Management
Portfolio management is the planning of investment opportunities based on the
risk tolerance of an investor, to meet the financial objectives at a given time frame.
On a more technical term, portfolio management is used in investment discussions
about stocks, bonds, time deposits, and other money market investments.
Investors have the principle of “putting eggs in different baskets”. This is called an
investment diversification. In cases where the investor has stagnant or excess
resources, they engage in different investing activities to gain profit. It can be used
to put up a store, offer credit to borrowers, finance a profit-making project, or invest
in the stock market, time deposit, bonds, and foreign exchange. These “baskets” are

called portfolios. Each portfolio is different in purpose, amount, risks, returns,

and time frame. A wise investor who is maintaining two or more accounts should
keep investment portfolios to keep track of the growth or losses in each investment.

By putting resources into different baskets (diversification), it will reduce or spread

the risks of losing all investments. In this example, the investor funds four
investment portfolios. If investment 3 falls, somehow, the risk of losing all investment
is low. But this should not mean that one will let go of investment 3 without further
financial and risk analysis.
It is important that investments have clear financial objectives, no matter how big or
small the investment is. In investing, time should be the investor’s ally because time
is one key for funds to grow. Harvesting too early may be more damaging to your
finances and objectives. More than anything else, getting an investment requires
continuous market study to enjoy substantial to maximum profits.

What’s In

Directions: In your own words, cite some situations that involve the following
business concepts. Write your answers on a separate sheet of paper. (2 to 3
sentences)
1.Investment Risks
___________________________________________________________________________
___________________________________________________________________________
2.Investment Returns or Gains
___________________________________________________________________________
___________________________________________________________________________
3.Risk-return Trade off
___________________________________________________________________________
___________________________________________________________________________

Scoring Rubrics:

The concept is well-defined and discussed comprehensively

9-10 pts
through giving of example or illustration.
The concept is well defined and discussed but without
6-8 pts
example or illustration.
The concept is defined and discussed ambiguously but is
3-5 pts
acceptable.
The concept is not accurately defined, and the explanation is
1-2 pts
far from the concept or main idea.
 What’s New

Directions: Identify the type of investment risk best demonstrated in each of the
following situations. Choose your answer in the box below. Write your
answers on a separate sheet of paper.

Market Risk Liquidity Risk Concentration Risk

Inflation Risk Horizon Risk
Credit Risk Reinvestment Risk

1. Many businesses are economically affected by COVID-19 pandemic.

2. An investment was originally priced at Php 200,000.00, but due to unit price
change, it has a fair market value of Php 150,000.00 and may continue to go
down. The investor no longer has the intention of keeping it and wants to sell
it at Php 140,000.00.
3. A person put his money on a time deposit and accumulated the agreed
interest. However, at maturity, the value seemed to have no significant effect
on purchasing power due to inflation.
4. Based on a performance record, a government bond can give a maximum of
5% interest on investments. However, upon maturity, the interest was only
2%.
5. An investor managed two types of investment portfolios with distribution of
70% and 30% from his resources. However, the portfolio with 70% investment
was not doing good in the market.

Notes to the Teacher / Facilitators

To better understand the investment risk and return, cite a video,

article or a short story of successful individuals investing in different
platforms. Through this, students can understand that all
investments have risk, yet success will follow if people know how to
control these risks.
 What Is It

Directions: Analyze the case and answer the question that follow. Write your answers
on a separate sheet of paper.
The Online Business Fad

Filipinos are the number one social media users. The "Digital 2019: Global
Digital Overview" showed stats that Filipinos spend an average of 10 hours and 2
minutes on the internet via any device (ABS-CBN News 2019). In addition, during
the pandemic, social media is even more functional to sellers and convenient to
buyers. Before, varieties of products sold online are apparels, toiletries, and seasonal
delicacies. Recently, the fad of online business has come into a wider spectrum of
products to choose from.
1. What type of risk/s can an online seller experience? Explain. (2 to 3 sentences)
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. Discuss the risk-return trade-off for an online seller. (2 to 3 sentences)
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
Scoring Rubrics:

The concept is well-defined and discussed comprehensively

9-10 pts
through giving of example or illustration.
The concept is well-defined and discussed but without
6-8 pts
example or illustration.
The concept is defined and discussed ambiguously but is
3-5 pts
acceptable.
The concept is not accurately defined, and the explanation is
1-2 pts
far from the concept or main idea.

What’s More

Directions: Analyze the case and answer the questions that follow. Write your
answers on a separate sheet of paper.
 Stock Market: Is it Affordable?

Stocks are shares of ownership in a corporation. A corporation can sell stocks

publicly to encourage more investors. The Philippines Stock Exchange (PSE) is the
market where these corporations sell stocks. Once an investor buys stocks from a
corporation, he/she becomes a part-owner of that corporation. The earnings from
stock trading are in the form of dividends (percent share in the income of the
corporation) and stock price appreciation (increase in the price of the stock).

Investors buy shares of a corporation to increase capitalization because the

stocks can shoot up prices over time from how much it was originally bought. For
example, an investor buys 10,000 shares from a well-known construction firm for
Php 100,000.00 at Php 10.00 at the current market price. After 20 years, the stock
price becomes Php 50.00 and the value of the investment is Php 500,000.00. This
scenario is the usual motivation for an investor to engage in the stock market.

Blue Chips companies are big companies that are the safest to invest on. It is seen
on the website of Philippine Stocks Exchange through PSE Edge
(https://edge.pse.com.ph/companyDirectory/form.do).

Let us assume these examples as Blue Chips companies.

1. Alana Land, Inc. Php 31.60

2. BPO Unibank, Inc. 85.30
3. Bank of the Filipinos 64.60
4. Jolli Foods Corporation 128.40
5. Metropolis Bank and Trust Company 33.65
6. Puresilver Price Club, Inc. 47.65
7. San Miguelito Corporation 96.40
8. Universal Robinhood Corporation 124.50

If the risk of loss is 25% while the chance of return is 40%, and given
that you have a Php 100,000.00 amount for investment, which of the
mentioned blue chips will you buy? Discuss your risk tolerance as an investor
and explain the risk-return trade-off of your chosen investment. (5 sentences)
___________________________________________________________________________
___________________________________________________________________________

Scoring Rubrics:
The concept is well-defined and discussed comprehensively
9-10 pts
through giving of example or illustration.
The concept is well-defined and discussed but without
6-8 pts
example or illustration.
 The concept is defined and discussed ambiguously but is
3-5 pts
acceptable.
The concept is not accurately defined, and the explanation is
1-2 pts
far from the concept or main idea.

What I Need to Remember

Questions to ponder:
• In your own words what is your understanding of the advantages or
disadvantages in risk return trade off?
• Discuss how your managerial skills vary in terms of decision making when
considering risk return trade off.
• How does the risk return trade off schedule really help you see how your
investment move to its progress?

What I Can Do

Stressed Economy
Directions: Cut and paste a news article containing the effects of pandemic to a
business. Paste the article on a separate sheet of paper.
Questions:
1. What kind of business/industry is affected?
___________________________________________________________________________
___________________________________________________________________________
2. What investment risk/s are involved? Explain. (5 sentences)
___________________________________________________________________________
___________________________________________________________________________
3. Suggest at least one (1) strategy on how they can improve operations even
under community quarantine.
___________________________________________________________________________
___________________________________________________________________________
Scoring Rubrics:
The concept is well-defined and discussed comprehensively
9-10 pts
through giving of example or illustration.
The concept is well-defined and discussed but without
6-8 pts
example or illustration.
The concept is defined and discussed ambiguously but is
3-5 pts
acceptable.
The concept is not accurately defined, and the explanation is
1-2 pts
far from the concept or main idea.
 Assessment (Posttest)

Directions: Select the letter of the best answers to the given items. Write your
answers on a separate sheet of paper.

1. Which is a feasible investment risk?

A. Mark promises investors that they can double their money in 10 years.
B. Mark promises investors that no loss will be incurred in 10 years.
C. Mark does not promise that the investment would grow as much as 10%
but will depend on market situations.
D. All the above

2. Which situation shows an investment return?

A. Sasha invests Php 100,000.00 in a cooperative and gets Php 101,000.00
after a year.
B. Sasha saves Php 100,000.00 in a bank and gets Php 200.00 interest per
month.
C. Sasha saves Php 1,000.00 in a coin bank per month.
D. Sasha plans to establish a sari-sari store with her Php 100,000.00.

3. Danny B, is a business owner. For 5 years in the business, he saved Php

500,000.00 in his bank account. Danny invests a part of this money into a
government bond with low risk but low return. What type of risk tolerance is
shown?
A. aggressive risk C. low
B. conservative risk D. moderate risk

4. Which of the following situations shows portfolio management?

A. Mr. Benjie saves money in a coin bank. He owns 10 coin banks overall.
B. Ms. Ivee won Php 1,000,000.00 from lottery. She saved Php 500,000.00 in
a savings account, put Php 300,000.00 in a time deposit and put up a
store for Php 200,000.00.
C. Mr. Ali gets Php 50,000.00 from bonus, Php 10,000.00 from commission
and Php 5,000.00 from his salary.
D. Ms. Rowena has 4 bank accounts; all are payroll accounts. She has been
working four jobs to feed her family. (statement arrangement)

5. Local prices of farm goods are negatively affected by high importation. Due to
this, farmers have no choice but to accept the lowest market prices for their
highly perishable products. What risk is involved in the situation?
A. Credit C. market
B. inflation D. reinvestment
6. The investment proposal with the greatest relative risk would have
A. the highest coefficient of variation of net present value.
B. the highest standard deviation of net present value.
C. the highest expected value of net present value.
D. the lowest opportunity loss likelihood.

7. Probability-tree analysis is best used when cash flows are expected to be _________.
A. Independent over time. C. Related to the cash flows in previous periods.
B. Known with certainty. D. Risk-free.

8. You are considering two mutually exclusive investment proposals, project A and
project B. B's expected value of net present value is $1,000 less than that for A and
A has less dispersion. On the basis of risk and return, you would say that
A. Project A dominates project B.
B. Project B dominates project A.
C. Project A is more risky and should offer greater expected value.
D. Each project is high on one variable, so the two are basically equal.

9. If two projects are completely independent or unrelated, the measure of correlation

between them is ________.
A. 0 C. 1
B. 0.5 D. -1

10. Managerial options can be viewed as _________.

A. methods for reducing agency risk through the use of incentives.
B. opportunities for altering management decisions in the future.
C. methods for reducing total firm risk through diversification.
D. strategies for increasing management compensation.

11. A managerial option, in effect, _________.

A. applies only to new projects.
B. limits the profit potential of a proposed project.
C. limits the downside risk of an investment project.
D. limits the flexibility of management's decision-making.

12. When using a probability tree approach, we discount the various cash flows to
their present value at the _________.
A. after-tax cost of the firm's long-term debt.
B. firm's weighted average cost of capital.
C. project's required rate of return.
D. risk-free rate.

13. The presence of managerial or real options ________ the worth of an investment
project.
A. increases C. does not affect
B. decreases D. increases or decreases
14. This refers to the difference between the present value of cash inflows and the
net present value of cash outflows over a period.
A. internal rate of return C. net present value
B. payback method D. none of the above

15. What kind of investment is said to have higher returns?

A. Average risk C. Low risk
B. High risk D. Risk free

Answer Key

References
https://www.investopedia.com/terms/f/financialinstrument.asp
https://talentedge.com/articles/role-financial-management-organization/
https://marketbusinessnews.com/financial-glossary/financial-instrument/
https://www.thebalance.com/what-are-derivatives-3305833
https://www.thebalance.com/an-introduction-to-the-financial-markets-3306233
https://www.investopedia.com/terms/f/financialinstitution.asp
https://search.yahoo.com/search?fr=mcafee&type=E210US91213G0&p=financial+institution
https://kalyan-city.blogspot.com/2011/11/what-is-finance-meaning-definition.html
https://www.investopedia.com/terms/f/financial-market.asp
https://www.investopedia.com/terms/f/financialinstitution.asp

Congratulations!
You are now ready for the next module. Always remember the following:

1. Make sure every answer sheet has your

▪ Name
▪ Grade and Section
▪ Title of the Activity or Activity No.
2. Follow the date of submission of answer sheets as agreed with your
teacher.
3. Keep the modules with you AND return them at the end of the school year
or whenever face-to-face interaction is permitted.