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Business Finance
Quarter 4 – Module 5
Strategies in Reducing
Investment Risk

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Business Finance – Grade 12
Alternative Delivery Mode
Quarter 4 – Module 5: Strategies in Reducing Investment Risk

First Edition, 2020

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Published by the Department of Education

Secretary: Leonor Magtolis Briones
Undersecretary: Diosdado M. San Antonio

Development Team of the Module

Writer: Ronquilio G. Daño, LPT

Editor: Felicidad S. Alipe
Management Team: Bianito A. Dagatan EdD, CESO V
Schools Division Superintendent

Casiana P. Caberte PhD

Assistant Schools Division Superintendent

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EPS, Mathematics

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 Lesson 1: Asset Allocation

Learning Competencies: Measure and list ways to minimize or reduce investment risks
in simple case problems
(ABM_BF12-IVm-n-25)

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

 identify asset allocation as strategy in reducing investment risks
 identify portfolio diversification as strategy in reducing investment risks
 identify dollar cost averaging as strategy in reducing investment risks

What is it?
Appropriate asset allocation refers to the way you weight the investments
in your portfolio to try to meet a specific objective — and it may be the single most
important factor in the success of your portfolio in considering the risks and
rewards of major asset classes:
1. Stocks
 Can carry a high level of market risk over the short term due to fluctuating
markets
 Historically earn higher long-term returns than other asset classes
 Generally outpace inflation better than most other investments over the long
term
2. Bonds
 Generally have less severe short-term price fluctuations than stocks and
therefore offer lower market risk
 Can preserve principal and tend to provide lower long-term returns and have
higher inflation risks over time
 Bond prices are likely to fall when interest rates rise (if you sell a bond
before it matures, you may get a higher or lower price than you paid,
depending on the direction of interest rates)
3. Money market instruments
 Among the most stable of all asset classes in terms of returns, money
market instruments carry low market risk
 Generally don't have the potential to outpace inflation by a large margin
 Not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.

What’s more?

Directions:
Write S if the statement described Stocks, B if it is Bonds and MMI if it is
Money Market Instruments. Use the answer sheet provided.
1. Generally have less severe short-term price fluctuations than stocks
and therefore offer lower market risk.
2. Not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
3. Can carry a high level of market risk over the short term due to
fluctuating markets.
4. Can preserve principal and tend to provide lower long-term returns
and have higher inflation risks over time.

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 Lesson 2: Portfolio Diversification

What is it?
Portfolio is a collection of financial investments like stocks, bonds,
commodities, cash, and cash equivalents, including closed-end funds and exchange
traded funds.
Portfolio diversification is the process of selecting a variety of
investments within each asset class to help reduce investment risk.
Diversification across asset classes may also help lessen the impact of major
market swings on your portfolio.

How portfolio diversification works?

If you were to invest in the stock of just one company, you'd be taking on
greater risk by relying solely on the performance of that company to grow your
investment. This is known as "single-security risk" — the risk that your
investment will fluctuate widely in value with the price of one holding. But, if
you instead buy stocks in 15 or 20 companies in several different industries,
you can reduce the potential for a substantial loss. If the return on one
investment is falling, the return on another may be rising, which may help
offset the poor performer. Keep in mind, this doesn’t eliminate risk, and there is
no guarantee against investment loss.

What’s more?

Directions:
Write true if the statement is correct and false if it is not. Use the answer
sheet provided.
1. Portfolio diversification is to find many investments for each asset.
2. Diversification across asset classes may also help reduce the impact
of major market swings on your portfolio.
3. Portfolio is a collection of financial investments like stocks, bonds,
commodities, cash, and cash equivalents, including closed-end
funds and exchange traded funds.
4. Portfolio is financial investments like cash and cash e equivalents.

Lesson 3: Dollar Cost Averaging

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 What is it?
Dollar-cost averaging is a disciplined investment strategy that can help
smooth out the effects of market fluctuations in the portfolio. With this approach, you
apply a specific dollar amount toward the purchase of stocks, bonds and/or mutual
funds on a regular basis. As a result, you purchase more shares when prices are low
and fewer shares when prices are high. Over time, the average cost of your shares will
usually be lower than the average price of those shares. And because this strategy is
systematic, it can help you avoid making emotional investment decisions.

What’s more?

Directions:
Write true if the statement is correct and false if it is not. Use the answer
sheet provided.

1. Dollar-cost averaging is an investment using peso currency.

2. Dollar-cost averaging can help avoid making emotional investment
decisions.
3. Dollar-cost averaging is a disciplined investment strategy that can
help smooth out the effects of market fluctuations in the portfolio.
4. The average cost of your shares will usually be lower than the average
price of those shares.

Assessment

Direction:
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 Read each item carefully and write the letter of your choice on your
answer sheet.

1. This refers to the way you weight the investments in your portfolio to
try to meet a specific objective.
A. asset allocation C. portfolio
B. dollar-cost averaging D. portfolio diversification
2. This can be carried in a high level of market risk over the short term
due to fluctuating markets.
A. bonds C. financial instruments
B. stocks D. money market instruments
3. This can be preserved its principal and tend to provide lower long-
term returns and have higher inflation risks over time
A. money market instruments C. stocks
B. financial instruments D. bonds
4. This refers to the most stable of all asset classes in terms of returns
and money market instruments carry low market risk.
A. financial instruments C. money market instruments
B. bonds D. stocks
5. This refers to a collection of financial investments like stocks, bonds,
commodities, cash, and cash equivalents.
A. dollar-cost averaging C. portfolio diversification
B. asset allocation D. portfolio
6. This refers to the process of selecting a variety of investments within
each asset class to help reduce investment risk.
A. portfolio diversification C. asset allocation
B. portfolio D. dollar-cost averaging
7. This refers to a disciplined investment strategy that can help smooth
out the effects of market fluctuations in the portfolio.
A. asset allocation C. portfolio
B. portfolio diversification D. dollar-cost averaging
8. This is a major class of asset that prices are likely to fall when
interest rates rise.
A. stocks C. money market instruments
B. bonds D. financial instruments
9. This refers to an approach that applies a specific dollar amount
toward the purchase of stocks, bonds and/or mutual funds on a
regular basis.
A. dollar-cost averaging C. asset allocation
B. portfolio diversification D. portfolio
10. This is generally have less severe short-term price fluctuations than
stocks and therefore offer lower market risk
A. bonds C. stocks
B. money market instruments D. financial instruments

Answer Sheet

Name: __________________________________________________________

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Grade & Section: ________________ Score: _______

Quarter 4 – Module 5

Lesson 1
What’s more?
1.
2.
3.
4.

Lesson 2
What’s more?
1.
2.
3.
4.

Lesson 3
What’s more?
1.
2.
3.
4.

Assessment
1. 2. 3. 4. 5. 6. 7.

8. 9. 10.

References

Nick L. Aduana (2017). Business Finance in the Philippine Setting for Senior
High. 839 EDSA, South Triangle Quezon City, Philippines: C & E Publishing, Inc.