Unit 6: Introduction to Investments

6.1. Introduction to Investments

Questions to Ponder
1. What factors affected your decision in choosing between options? What does it say
about your risk tolerance?
Answers may vary depending on the student’s attitude towards risks. A sample answer
could be: I considered the option with the least risk. I prefer my money to grow slowly but
surely rather than try to gain a lot of money in an instant.

2. Based on the assessment, how does risk tolerance affect the type of investment a
person chooses?
People with a high tolerance for risk will most likely go for higher-risk investments.

3. Aside from risk factors, what other variables will you consider when investing?
Answers may vary. Aside from risk factors, I should also consider how much risk I can
take. For instance, how much money am I willing to lose in case my investment turns out
bad?

Check Your Progress

1. Relate the objectives of investing with the various forms of investment returns. How
can these factors help in investment decisions?
Investors can decide the type of investment they want depending on their objectives and
expected return. For instance, if an investor wants an additional source of income, that
investor should go for income-generating investments.

2. What are the differences between investment and gambling?

Investors put their money into a company, project, or venture with the expectation of
earning a return on that investment. They can calculate the possible return, manage risk,
and determine the degree of their gains or losses. On the other hand, a gamble has an
uncertain outcome. It is purely based on luck and chances.

3. How can the type of risk influence the investment decision of an individual?
Answers may vary. An individual can assess which type of risks he or she can manage.

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He or she can also determine which ones have the potential to affect investments
significantly. Such risk assessment can help an individual choose the type of investment
where the possibility of loss is minimal.

4. How can a company or an individual protect its investments?

It can be through investment risk management, and there are different means of
managing risks, such as diversification, investing consistently, and investing for the long
term.

Try This

A. Identification. Write the correct answer in the provided space before each number.

Financial Risk 1. It is the type of investment risk caused by the inability of a

company to pay its debts or meet its financial obligations.

Business Risk 2. It is the type of risk associated with ups and downs due to an
unsuccessful business model.

Liquidity Risk 3. It is the type of risk associated with an asset that is difficult to
sell without lowering its price.

Political Risk 4. It is a type of country risk caused by changes in government

leadership and instability.

Market Risk 5. It is the risk of a security's value going down because of factors
in the overall market conditions.

Diversification 6. It refers to the strategy of investing in various asset classes.

Exchange Rate Risk 7. It is the chance that changes in exchange rates will affect the
value of an investment.

Natural disaster risk 8. It is the risk of natural occurrences affecting the value of
investments.

Economic Risk 9. This risk is associated with inflation, recession, and market

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volatility.

Country Risk 10. It is the likelihood that a country will experience political or
economic instability that could adversely affect the
performance of investments in that country.

Practice Your Skills

Read and analyze each item. Answer the questions in 2 to 3 sentences.

1. Maria bought an antique coin. She intended to hold it as an investment, expecting

that its value would rise and she could sell it for a higher price in the future. A few
years later, Maria urgently needed some money. She found an honorable antique
coin collector who told her that the coin would be difficult to sell at its full value due
to current market conditions and consumer preferences. Since Maria needed the
cash immediately, she offered to sell it at a much lower price than the coin's
supposed value. What risk/s did Maria fail to consider when she purchased the coin
a few years back?
Answers may vary. Maria expected that the coin would appreciate. However, she did
not realize that a liquidity risk would be associated with that particular kind of
investment. Although the value may have risen, finding a coin buyer in an instant may be
challenging. Thus, her investment is difficult to transform back into cash unless she
lowers its selling price.

2. Mark offered Jose his idea for a printing business. The main customers are students
from a nearby school. It would only require a laptop, printer, and a supply of papers.
Marke needed ₱10,000 as start-up capital. He asked Jose for a loan and pledged to
pay back ₱10,000 and give Jose 25% of the profit for the first three months of the
business. In the first month, Mark earned some money. However, the school
suspended face-to-face classes, and he had to close the business. He could not
return the money he borrowed from Jose. Thus, Jose lost ₱10,000. What risk/s did
Jose experience? Explain your answer.
Answers may vary. Jose lent money to Mark, facing business and financial risk. The
business risk comes from the lack of sustainability plans in situations such as suspended

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school activities. Such a problem gave rise to financial risk where Jose could not repay his
obligations to Jose.

3. Company ABC wants to invest in a particular country. Preliminary negotiations were

done, and the institutions sent the proposals. Suddenly, allegations of corruption
against the current government surfaced. The people of the country were highly
dissatisfied with their current leader. Analysts predict that a prolonged period of
power struggle will happen between the government and the opposition. What kind
of risk/s does Company ABC suddenly face? Explain your answer.
Answers may vary. Company ABC is suddenly confronted with country risk. The
prolonged power struggle may cause political and economic instability. The expected
return from investments may differ significantly from what is expected.

4. Danny was recently promoted to a higher position in his company. His salary
increased, and he now has extra funds amounting to ₱20,000 monthly. He wants to
use this money to start investing. Since he worked hard for his money, he wants to
ensure that there will be no loss and the investment is liquid. Describe Danny's
investment objectives and classify the type of investment suitable for his risk
tolerance.
Danny's primary aim is to secure his money and remain liquid. His investment is not
aimed at earning or growing wealth. Since he wants his investment to be liquid, a
low-risk and short-term investment would suit his preferences.

5. There are many benefits to diversifying your investment portfolio. Investing in

various assets can minimize your risk and maximize your potential for returns. Is
diversification suitable for all kinds of investors?
Answers may vary. Investors should, ideally, aim to diversify their portfolios.
Diversification is an investment strategy that involves spreading your investment across
various asset types and industries to mitigate the risk of loss. Diversifying your
investment portfolio makes you less likely to experience a severe loss should one
particular asset or industry perform poorly. However, it requires the investor to have
enough surplus funds to invest in different assets.

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Challenge Yourself
Recall your previous lessons and integrate them with the concept of investment and risks.
Answer the following questions.

1. It is essential for companies to carefully consider the financial risk to protect their
financial health and shareholders' investment. Recall the concept of insurance. How
can companies use it to manage financial risk?
Answers may vary. There are several ways to manage financial risk, including
insurance. Insurance is a form of risk management that protects against financial loss by
transferring the risk to an insurance company.

2. Banks must maintain a certain level of liquidity to meet their obligations to

depositors. Recall which assets are essential in managing a bank's liquidity risk.
Explain how banks can use these assets.
Answers may vary. Liquidity risk is managed through cash on hand and liquid assets.
Liquid assets can be quickly converted into cash, such as investments in short-term debt
instruments. Cash on hand is typically used to meet short-term obligations, such as
customer withdrawals, while liquid assets are used to meet longer-term obligations.

3. There is a chance that something could go wrong in your business. It can come from
financial, operational, legal, and reputational risks. How can you prevent this from
happening?
Answers may vary. There are a few different ways to manage business risk. One way is
to create a business risk management plan. This plan will identify the different types of
risks your business faces, making a process for dealing with them. Another way to
manage business risk is to purchase insurance. This plan can help protect your business
financially if something does go wrong.

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