Republic of the Philippines

MAILA ROSARIO COLLEGE

Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

COLLEGE OF BUSINESS ADMINISTRATION

MAJOR IN FINANCIAL MANAGEMENT
1st SEMESTER, S.Y. 2021 – 2022
PRELIM COVERAGE

Module in
INVESTMENT AND PORTFOLIO MANAGEMENT

MODULE NO.: 03

NAME OF STUDENT: ___________________________________________________

YEAR / SECTION: ______________________________________________________
DATE RECEIVED: ______________________________________________________

INSTRUCTOR: ELEINE T. ALVAREZ

NOTE: Please be cautious in following the given instructions in each activity. Correspondingly, observe
punctuality in accomplishing this module. God bless and happy learning! – INSTRUCTOR
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

I. OVERVIEW
This module focus is to develop analytical and evaluating skills connected to context
and content type of risk, sources of risk and why the need for and importance of
investing.

II. LEARNING OBJECTIVES

In this learning module, the learner is expected to:
Apply how is risk associated with the reward characteristics of investments

III. GUIDE QUESTIONS

1.What are the two types of risk?
2. Where does risk source from?
3. What are the benefits of investing?

IV. LESSON PROPER

Page 2 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

Key Differences Between Systematic Risk vs Unsystematic Risk

1. Systematic risks are uncontrollable in nature. Unsystematic risks are controllable

in nature.

2. Systematic risks are non-diversifiable whereas unsystematic risks are

diversifiable.

3. Systematic risks cannot be controlled, minimized, or eliminated by an

organization or industry as a whole. On the other hand, unsystematic risks can
be easily controlled, minimized, regulated, or avoided by the organization.

4. Systematic risks are a result of external factors. These types of risks take place
due to macro-economic factors i.e. political, social, and economic factors. On the
other hand, unsystematic risks are a result of internal factors taking place in an
enterprise. In other words, these types of risks take place as a result of
microeconomic factors.

5. Systematic risks have the potential to put an entire industry or an overall

economy into total distress whereas unsystematic risks have the potential to put
an organization into distress.

6. The types of systematic risks are interest risk, inflation risk, purchasing power
risk, and market risk whereas the types of unsystematic risks are financial risk
and business-specific risk.

7. Systematic risks are unavoidable in nature whereas unsystematic risks are

avoidable in nature.

8. When it comes to hedging, systematic risk is concerned with the proper

allocation of the assets while the unsystematic risk is concerned with portfolio
diversification.

Page 3 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

9. Examples of systematic risk are inflation, rise in unemployment rates, the higher
rate of poverty, corruption, changes in the interest rates, change in price rates,
etc whereas the examples of unsystematic risk are high rate of employee
turnover, employee strike, higher costs of operational activities, manipulation of
financial statements, etc.

10. Beta is used for the measurement of systematic risk or in other words, it is an
indicator of systematic risks. On the other hand, unsystematic risks cannot be
measured with the help of a particular tool. It is measured by means of getting
the systematic risk subtracted from the total risk.

PERSONAL RISKS
This is a category of risk which deals with the personal level of investing. The investor is
likely to have more control over this type of risk compared to others.
a. Timing risk
 is the risk of buying the right security at the wrong time. It also refers to selling
the right security at the wrong time.
 For example, there is the chance that a few days after you sell a stock it will
go up several dollars in value. There is no surefire way to time the market.

b. Tenure risk
 is the risk of losing money while holding onto a security. During the period of
holding, markets may go down, inflation may worsen, or a company may go
bankrupt.
 There is always the possibility of loss on the company-wide level, too.

COMPANY RISKS
There are two common risks on the company-wide level
a. Financial risk
 is the danger that a corporation will not be able to repay its debts.

Page 4 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

 The more assets financed by debts (i.e., bonds and money market
instruments), the greater the risk.

b. Management risk
 is the risk that a company's management may run the company so poorly that
it is unable to grow in value or pay dividends to its shareholders.
 This greatly affects the value of its stock and the attractiveness of all the
securities it issues to investors.

MARKET RISKS
Fluctuation in the market as a whole may be caused by the following risks:
a. Market risk
 is the chance that the entire market will decline, thus affecting the prices and
values of securities.
 is influenced by outside factors such as embargoes and interest rate
changes.

b. Liquidity risk
 is the risk that an investment, when converted to cash, will experience loss in
its value.
 When you want to sell the stock, you are currently holding, there is nobody
there to buy your stock, meaning that there is no volume in that stock.

NATIONAL AND INTERNATIONAL

National and world events can profoundly affect investment markets
a. Economic risk
 the danger that the economy as a whole will perform poorly.
 When the whole economy experiences a downturn, it affects stock prices, the
job market, and the prices of consumer products.

b. Industry risk
 is the chance that a specific industry will perform poorly.
 When problems plague one industry, they affect the individual businesses
involved as well as the securities issued by those businesses. They may also
cross over into other industries.
 For example, after a national downturn in auto sales, the steel industry may
suffer financially

c. Tax risk
 is the danger that rising taxes will make investing less attractive.
 nations with relatively low tax rates, such as the United States, are popular
places for entrepreneurial activities.

d. Political risk
 is the danger that government legislation will have an adverse effect on
investment.
 include wars, changes in government leadership, and politically motivated
embargoes.

Page 5 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

Longer life expectancy

Investment decisions have become more significant as most people retire between the
ages of 56 to 65. Investment decisions have to be planned to make wise saving
decisions. Saving on their own does not increase wealth; the saving must be invested in
such a way that the principal and income will be adequate for a greater number of
retirement years. Longer life expectancy is one reason for effective savings and further
investment activities that help the investment decisions.

Increasing rates of taxation

When tax rate is increased, it will focus on generating savings by the tax payer. When
the tax payer invests their income in provident fund, pension fund, Unit Trust Funds, Life
Insurance, Unit Linked Insurance Plan, National Saving Certificates, Development
Bonds, Post Office Cumulative Deposit Schemes, etc., it affects their taxable income.

Interest rates
Interest rate is one of the most important aspects of a sound investment plan. The
interest rate differs from one investment to another. There may be changes between
degree of risk and safe investments. They may also differ due to different benefit
schemes offered by the institutions. A high rate of interest may not be the only factor
favoring the outlet for investment. Stability of interest is an important aspect of receiving
a high rate of interest.

Inflation
Inflation has become a continuous problem. It affects in terms of rising prices. Several
problems are associated and coupled with falling standards of living. Therefore,
investor’s careful scrutiny of the inflation will make further investment process delayed.
Investor ensures to check the safety of the principal amount and security of the
investment. Both are crucial from the point of view of the interest gained from the
investments.

Income
Income is another important element of the investment. When government provides
jobs to the unemployed persons in the country, the ultimate result is ensuring income
than saving the extra income. More incomes and more avenues of investment have led
to the ability and willingness of working people to save and invest their funds.

Investment channels

Page 6 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

The growth and development of the country leading to greater economic prosperity has
led to the introduction of a vast area of investment outlets. Investment channels mean
an investor is willing to invest in several instruments like corporate stock, provident fund,
and life insurance, fixed deposits in the corporate sector and unit trust schemes.

WHY IS INVESTING IMPORTANT?

 Investing your money can allow you to grow it. Most investment vehicles, such as
stocks, certificates of deposit, or bonds, offer returns on your money over the
long term. This return allows your money to build, creating wealth over time.
 As you are working, you should be saving money for retirement. Put your
retirement savings into a portfolio of investments, such as stocks, bonds, mutual
funds, real estate, businesses, or precious metals. Then, at retirement age, you
can live off funds earned from these investments.
 Some investment vehicles, like employer-sponsored 401(k)s, allow you to invest
your pre-tax dollars. This option allows you to save more money than if you could
only invest your post-tax dollars.
 Investing is an important part of business creation and expansion. Many
investors like to support entrepreneurs and contribute to the creation of new jobs
and new products. They enjoy the process of creating and establishing new
businesses and building them into successful entities that can provide them with
a strong return on their investment.
 Many investors like investing in people, whether they are business owners,
artists, or manufacturers. These investors feel good helping others achieve their
goals.

SAVING MONEY
Saving money is the process of putting cold, hard cash aside and parking it in extremely
safe, and liquid (meaning they can be sold or accessed in a very short amount of time,
at most a few days) securities or accounts. This can include checking accounts and
savings accounts secured by the Federal Deposit Insurance Corporation (FDIC). This
can include United States Treasury bills. This can include money market accounts (but
not always money market funds as you need to look at the holdings and structure
closely).

Page 7 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

Above all, cash reserves must be there when you reach for them; available to grab, take
hold of, and deploy immediately with a minimal delay no matter what is happening
around you. Many famous wealthy investors actually advocate keeping a lot of cash
hidden on hand somewhere that only you know about even if it involves a major loss.

INVESTING MONEY
Investing money is the process of using your money, or capital, to buy an asset that you
think has a good probability of generating a safe and acceptable rate of return over
time, making you wealthier even if it means suffering volatility, perhaps even for years.
True investments are backed by some sort of margin of safety, often in the form of
assets or owner earnings. As you know, the best investments tend to be so-called
productive assets such as stocks, bonds, and real estate.

How Much Should I Save vs. Invest?

Saving money should almost always come before investing money. Think of it as the
foundation upon which your financial house is built. The reason is simple. Unless you
inherit a large amount of wealth, it is your savings that will provide you with the capital to
feed your investments. If times get tough and you require cash, you'll likely be selling
out your investments at the worst possible time. That is not a recipe for getting rich.

Two Primary Types of Savings Programs You Should Include In Your Life
• As a general rule, your savings should be sufficient to cover all of your personal
expenses, including your mortgage, loan payments, insurance costs, utility bills,
food, and clothing expenses for at least three to six months. That way, if you lose
your job, you’ll be able to have sufficient time to adjust your life without the
extreme pressure that comes from living paycheck to paycheck.

• Any specific purpose in your life that will require a large amount of cash in five
years or less should be savings-driven, not investment-driven. The stock market
in the short-run can be extremely volatile, losing more than 50% of its value in a
single year.

Only after that these things are in place, and you have health insurance, should you
begin investing. The only possible exception is putting money into a 401(k) plan at work
if your company matches your contributions. That’s because not only will you get a
substantial tax break for putting money into your retirement account, but the matching
funds basically represent free cash that is being handed to you on a silver tray and
there are material bankruptcy protections in place for assets held within such an
account should you be wiped out entirely.

V. EVALUATION

Page 8 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

True or False: Write T if the statement is true and F if it’s not.

1. Systematic risk is caused by factors external

2. Systematic risks are controllable in nature
3. Unsystematic risks can impact the overall economy.
4. Company risks are risks that deals with the personal level of investing.
5. Saving is passive.
6. Investment aims only on wealth preservation.
7. Management risk is classified as company risk.
8. Liquidity risk is also classified as company risk.
9. Timing and tenure risk are under the personal risk.
10. It is better to save money after investing it.

TASK
ACTIVITY 1 Restricted Essay:
In 5 sentences, how is risk associated with the reward
characteristics of investments?

RUBRIC
Validity of Answer 4pts
Content Structure (spelling, grammar, punctuations) 1pts
TOTAL: 5pts

VI. REFERENCE/S
 Two Types of Risk | Sound Mind Investing
 Top 5 Reasons Why Investing is Important (dividendearner.com)
 5 Benefits of Investing - The College Investor
 Systematic Risk vs Unsystematic Risk | Top 9 Differences with Infographics
(educba.com)

Page 9 of 10
 Republic of the Philippines
MAILA ROSARIO COLLEGE
Diversion Road, San Gabriel Village, Tuguegarao City, Cagayan Valley
Contact No. (078) 377 – 249

COMPILED BY: CHECKED BY:

ELEINE T. ALVAREZ
BA Instructor BSBA, Coordinator

APPROVED BY:

ROMEO M. PASCUA, Ph.D.

Vice-President of Academic Affairs

Page 10 of 10