Name: Maica R.

Pontillas Section: AMN1 Date: 01/22/24

RISK AND RETURN EXERCISES

Part I

Carlos Reyes, a 30-year-old employee and earning P400,000 per annum, has accumulated savings of
P180,000. His family living costs amount to P20,000 a month of P240,000 per annum so that he can have
P160,000 as additional savings by the end of the year. In as much as he shall have extra cash of P340,000
by then, he has thought of the following options:

1st : Add the P160,000 to his savings account.

2nd : Leave P30,000 in his savings account and open a time deposit account for the balance of
P310,000 which can be rolled over every month.

3rd : Leave P20,000 in his savings account, transfer P100,000 to a premium savings account and the
remaining P220,000 to trust investment with a bank.

4th : Leave P120,000 in his savings account, transfer P150,000 to a bank’s trust investment and invest
the remainder of P70,000 in stocks.

5th : Leave P50,000 in his savings account, transfer P100,000 to a special savings deposit, invest
P150,000 in a bank’s trust investment, and invest the balance of P40,000 in stocks.

6th : Leave P50,000 in his savings account, transfer P100,000 to a special savings deposit, invest
P150,000 in a bank’s trust investment, invest P25,000 in stocks and use the balance of P15,000
for an educational plan for his children.

7th : Invest P250,000 in common trust funds and P90,000 in stocks.

Questions

1. What would be your two best investment options? Explain.

I think one of the best investment options would be number 6 because it offers a diversified
approach to investing. By allocating funds to different asset classes, it reduces risk and has the
potential to increase chances of earning returns. Another best investment option would be
number 7 which combines investment in common trust funds and stocks. It is a good investment
because it provides the opportunity to benefit from the expertise of professional managers who
make investment decisions on your behalf. Which allows you to access a diversified portfolio
without having to manage it by yourself. Also investing in stocks can offer higher returns over the
long term.

2. What investment option would you take the least? Explain.

Based on the options I think the investment that I would take the least is option 2. It is because it
involves investing in time deposit accounts. Which is actually not a bad thing since it is safe and
less risky, but it offers fixed interest which provides lower returns compared to other investment
 options. Also, rolling over the time deposit every month may limit the ability to take advantage of
better investment opportunities that may arise.

3. Assuming that Mr. Reyes chooses the 5 th alternative and invests P40,000 in stocks at the
beginning of the following year, compute for the holding period return if at the end of the
following year the price of the stocks is P44,500 and dividend of P2,700 was received by Mr.
Reyes during the year.

Formula:

Holding Period Return = ((Final Value + Dividends - Initial Investment) / Initial Investment) * 100

Given:

Initial Investment: Mr. Reyes invests P40,000 in stocks at the beginning of the year.

Final Value of Investment: At the end of the year, the price of the stocks is P44,500.

Dividends Received: Mr. Reyes received a dividend of P2,700 during the year.

Calculation:

Final Value - Initial Investment = Capital Gain or Loss

P44,500 - P40,000
=P4,500
Capital Gain + Dividends = Total Return
P4,500 + P2,700
= P7,200
Holding Period Return = (Total Return / Initial Investment) * 100
(P7,200 / P40,000) * 100

18%
Part 2

The following information pertains to investments in ADNU stocks.

K P

(Return) (Probability)

20% .2

8 .3

8 .3

6 .2

Required:

1. Compute for the expected value and the standard deviation.

2. If standard deviation for USI stocks is 7.2%, in which stocks would you invest? Explain.