Senior High School

Business Finance
Quarter 4 – Week 4: The definition,
purpose, kinds, advantages, and
disadvantages and the risks of
investment
Lesson 2 – Ways To Minimize or Reduce
Investment Risks in Simple Case Problems
 What I Need to Know

This module was designed and written with you in mind. It is here to help you measure and
list ways to minimize or reduce risks in simple case problems. 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.

After going through this module, you are expected to evaluate and list ways to minimize or
reduce investment risks in simple case problems.
 What I Know

True or False: Write True if the statement is correct and False if it is wrong.
1. Risk is the chance that the actual return would be different from
the expected return on an investment.
2. Diversification is a collection of financial assets which an
investor has decided to invest in.
3. Systematic risk is also referred to as a specific risk.
4. A portfolio is a risk management technique wherein an investor
includes a wide variety of assets or investment products in his investment mix.
5. It is almost impossible for an investor not to be affected by
unsystematic risk.
6. Real estate is an asset class that typically has little or no
correlation with stocks.
7. The rate of return on an investment has no effect on a long-term
investment program.
8. During inflationary times, there is a risk that the financial
return on an investment will not keep pace with the rate of inflation.
9. Once you have painstakingly developed a financial plan, it is not
wise to change it.
10. The amount of time that your investments have to work for you is
an important factor when managing your investment portfolio.

Lesson Ways and Means to Minimize

1 Investment Risks

Risk is defined as a chance of loss. In finance, it is the chance that the actual
return would be different from the expected return on an investment. There are two
fundamental types of risks:
 1. Systematic Risk – has effects that are wider in scope. It is almost impossible
for an investor to avoid this type of risk. Examples are: natural disaster- a massive
earthquake, a major political event- a coup de’ etat or a covid19 pandemic .
2. Unsystematic Risk – also referred to as specific risk, which affects only a
small number of assets. Examples would be a firm whose employees went on strike or
a major stockholder getting involved in a crime or scandal.

Investors resort to diversification which is a risk management technique

wherein an investor includes a wide variety of assets or investment products in his
portfolio of investments to minimize or protect themselves from unsystematic risk.

What’s In

Stretch Your Financially Inclined Mind

Arrange the jumbled words below to find the terms being described by the clues provided
below. These finance terms and concepts will be useful for you as you study the lessons
for this module.
1. CAMETSTISY =
2. LOFITOROP =
3. TRENUR =
4. FIVERCADVISOTIN =
5. SIRK =

Here are your clues:

1. The effect of this risk is wider in scope.
2. A collection of financial assets which an investor has decided to invest in.
3. Expected outcome or earnings from an investment
4. Risk management strategy of combining variety of assets to reduce risk
5. The chance of not realizing expected returns.
 Notes to the Teacher
The teacher must take into considerations the essential
skills needed in the development of this competency
including the background knowledge which may reinforce
learning. This module will help the learners link the gap of
learning to achieve mastery of the lesson.

What’s New

FINDING WORDS:
Let’s raise your level of investment skills. Draw a line connecting the letters to form
words suggested in the box.

1. Diversify
2. Risks
3. Portfolio
4. Treasury
5. Inflation

M F R R Q S T S U D M A I R
O I I E U T Y N E E O L N U
C P M R E R F Y R N T K F N
E R D I V E R S I F Y B L D
K A C U P A T L S O W G A B
P P U R I S K S K D D U T I
I N V E S U M E N T S A I F
 L M R P O R T F O L I O O K
P T O A S Y C U R I T I N S
S B L N I U K S M R O Q M U

What is It

Ways and Means to Minimize Investment Risks

1. Determination of tolerance to different kinds of risk

Understanding the type of risk, or the combination of types of risk, is essential in
reducing those risks. Two factors that can help determine the risk tolerance are:
a. Net worth – is assets minus liabilities.
b. Risk capital – is money that, if lost on an investment, won’t impact the financial
position and lifestyle.
If there is high net worth and substantial risk capital, the risk tolerance is higher.
But if the net worth and risk capital is modest or not much, it’s probable to be better off
with conservative, low-risk investments.

2. Conducting due diligence

This means making research about the investment instruments, checking out
the investment’s history, earnings’ growth, management team and debt load. This
information can be compared with other similar investment products and to other assets
in investment portfolio.

3. Diversification of investment portfolio

Diversification is a risk management strategy of combining a variety of assets to
reduce overall risk in an investment portfolio. One of its purpose is portfolio risk
management.
This lowers investments’ volatility as changes in market prices of different
investments can happen at different time intervals. This result in a more balance risk
and return or risk is spread over a variety of products.
4. Monitoring of investments
Regular reallocation of resources is necessary for control purposes. Proper
allocation of investments depends on such factors as age, investment period and
investment temperament.
It is necessary to evaluate holdings at least once a year to assess whether there
is a need to buy or sell assets to bring back the portfolio to proper asset allocation.

5. Taking advantage of government guaranteed investment products

It is very safe to invest in an instrument which is guaranteed by the government
like Treasury bonds. These investments are fully backed by the Philippine government
aside from an insurance from the Philippine Deposit Insurance Corporation (PDIC).
In addition, holding investment until its maturity is better considering market
risks and penalties except for a secured recovery of principal and interest.

What’s More

Investment Risk
As depicted by the image, explain what you understand about the concept of
diversification and its importance in making investment decisions.

What I Have Learned

1. Risk is the chance that the actual return would be different from the expected
return on an investment.
 2. There are two fundamental types of risks: systematic risk and unsystematic
risk.
3. The five ways and means to minimize investment risk are:
a. Determination of tolerance to different kinds of risk
b. Conducting due diligence
c. Diversification of investment portfolio
d. Monitoring of investments
e. Taking advantage of government guaranteed investment products
4. It is better for investors to diversify their investment portfolios in order to
minimize risk.
5. Equally important consideration when making investment decision is the risk
associated with an asset. Investors require higher returns on riskier assets.

What I Can Do

Apply It in Real Life

Before making the final decision to invest or not in a company or in a community

(like, starting a business), one of the most important considerations for investors is the
presence of sources of growth. In the Philippines, the two most obvious sources of
growth for the past two decades are remittances from OFWs and the presence of BPO
(business process outsourcing) companies. Investors adequate sources of growth to
progress. When they see these sources of growth, their confidence level to invest
increases.

You are an investment adviser. A businessman sought your help on what

investment is ideal in his community. To formulate the best advice, you are to consider
the sources of growth within his community and take note of the possible investments
that he can venture in. Prepare a report presenting the potential investments which
possess sources of growth. Then make sure to explain the gains and profit that the
businessman can acquire in each of the investments that you will suggest.
 Provide at least three potential investments that the businessman can consider.
Make sure to present the possible gains that the businessman can acquire. Prepare a
comprehensive report with graphic organizers (if necessary) to support your data. Your
report must be detailed, accurate, organized, logical, and feasible.

Assessment

Multiple Choice. Encircle your answer.

1. Why do different investors estimate inputs differently? Because
A. every investor has his/her own risk/return preferences
B. every investor has access to different information about securities
C. there is an inherent uncertainty in security analysis
D. there is a random selection process used by individual investors
2. Of the following four investments, which is considered the safest?
A. Commercial papers C. Treasury bills
B. Corporate bonds D. Treasury bonds
3. Shares and bonds are floated in
A. Capital market C. Equity market
B. Commercial bank D. Money market
4. If you want to deposit money in a bank, which will be a wise choice?
A. Compounding annually C. Compounding monthly
B. Compounding daily D. Compounding semi-annually
5. Which of the following help determine risk tolerance?
A. Assets and liabilties C. Net worth and risk capital
B. Expected return and risk D. Net worth and net earnings
6. Which of the following are considered the two fundamental types of risk?
A. Country risk and political risk C. Least risk and peak risk
B. Credit risk and interest rate risk D. Systematic and Unsystematic risk
7. The following are areas of consideration that will help you decide on your
investment alternative, EXCEPT:
A. Investment objective C. Expected return
B. Investment culture D. Expected risk
 8. Which of the following assets are considered medium risk investments?
A. Bank deposits C. High income bonds
B. Government bonds D. Money market
9. Which are NOT considered as key participants in the investment process.
A. Business C. Government
B. Charitable institutions D. Individuals
10. This risk refers to the movement of prices in the market as shaped by economic
and non-economic factors.
A. Country risk C. Market risk
B. Credit risk D. Unsystematic risk

Additional Activities

Extend your knowledge:

Research Work:
Visit the Web site of the following government agencies and learn more about
the concepts discussed in this module.

• Securities and Exchange Commission – www.sec.gov.ph

• Bangko Sentral ng Pilipinas – www.bsp.gov.ph

• Insurance Commission – www.insurance.gov.ph

References

Gamatero, Albert N. (2017) Business Finance (1st edition) . Diwa Learning Systems Inc.

De Guzman, Angeles A (2019) Business Finance for Senior High School (1st edition)
Lorimar Publishing Inc..

Development Team of the Module

Writer: ROSARIO D. LOPEZ – MT-I Becuran High School

Editor: JANE P. VALENCIA, EdD – EPS – Mathematics
Reviewer: JANE P. VALENCIA, EdD – EPS – Mathematics
ELSA A. LAQUINDANUM – MT-I San Isidro HS, Bacolor South
CHRISTINA P. SANTOS – MT-I SVSF HS
Illustrator: ROSARIO D. LOPEZ – MT-I Becuran High School
Layout Artist: ROSARIO D. LOPEZ – MT-I Becuran High School
ELSA A. LAQUINDANUM – MT-I San Isidro HS, Bacolor South
CHRISTINA P. SANTOS – MT-I SVSF HS
Language Reviewer:

Management Team

ZENIA G. MOSTOLES, EdD, CESO V, Schools Division Superintendent

LEONARDO C. CANLAS, EdD, CESE. Asst. Schools Division Superintendent
ROWENA T. QUIAMBAO, CESE, Asst. Schools Division Superintendent
CELIA R. LACNALALE, PhD, CID Chief
JANE P. VALENCIA, EdD, Education Program Supervisor, Mathematics
JUNE E. CUNANAN, Education Program Supervisor/ Language Editor
RUBY M. JIMENEZ, PhD., Education Program Supervisor, LRMDS